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245  5804 


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presented  to  the 
UNIVERSITY  LIBRARY 
UNIVERSITY  OF  CALIFORNIA 
SAN  DIEGO 

by 

Mr.    George  Marshall 


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INTERNATIONAL  FINANCE 
AND  ITS  REORGANIZATION 


OTHER  BOOKS 
By  ELISHA   M.  FRIEDMAN 

Editor  of 
AMERICAN  PROBLEMS 
OF    RECONSTRUCTION 

A  National  Symposium  on  the  Economic 
and  Financial  Aspects 

With  a  Foreword  by 
Franklin    K.    Lane 

Late  Secretary  of  the  Interior 

AMERICA  AND  THE  NEW  ERA 

Chapters  in  Social  Reconstruction 
With  a  Foreword  by 
Herbert  Hoover 

Secretary  of  Commerce 


Author  of 

LABOR  AND  RECONSTRUCTION 

IN  EUROPE 

With  an  Introduction  by 

William  B.  Wilson 

Ex-Secretary  of  Labor 

INTERNATIONAL    COMMERCE 
AND    RECONSTRUCTION 

With  a  Foreword  by 
Joseph  French  Johnson 

Dean  of  New  York  University  School  of  Commerce 

E.   P.  BUTTON    &    COMPANY 


INTERNATIONAL  FINANCE 
AND  ITS  REORGANIZATION 


BY 

ELISHA  M.   FRIEDMAN 

Lecturer  on  Finance,  New  York  University,  School  of  Commerce, 

Accounts  and  Finance;   Sometime  Statistician,  War 

Finance  Corporation;  Author  of  '^International 

Commerce  arid  Reconstruction,"  etc. 


NEW  YORK 
E.  P.  DUTTON  &  COMPANY 

68 1   Fifth  Avenue 


COPYBIGHT   1922,   BY 

E.  P.  BUTTON  &  COMPANY 


All  Rights  Reserved 


Printed  in  the  Unittd  Statet  of  Amtrica 


TO 

A.  BARTON  HEPBURN 

AND 

PAUL  M.  WARBURG 

BANKERS 

WHO  HAVE  MAINTAINED 

TRADITIONS  OF  SCHOLARSHIP  AND  PUBLIC  SERVICE; 

PIONEERS  IN   CURRENCY   REFORM 

AKD 

IN  THE  DEVELOPMENT  OF  THE   BANKING  SYSTEM 

TO   SERVE  AMERICA 

IN  HER  NEW  INTERNATIONAL  POSITION 


PREFACE 


If  Hegel's  dictum,  "we  learn  from  history  that  we  learn  noth- 
ing from  history"  is  true,  it  is  because  mankind  failed  to  view 
history  objectively  and  hitherto  regarded  itself  as  the  material  of 
a  blind  evolution  rather  than  as  the  director  of  the  social  processes. 
Nations  responded  unconsciously  to  the  forces  of  the  day  and  un- 
critically expressed  the  emotions  that  dominate  group  behavior. 
The  dissemination  of  the  scientific  attitude,  the  observation  of  the 
events  of  history  as  laboratory  variants,  may  help  the  world  to 
learn  from  experience  and  to  avoid  the  repetition  of  much  misery 
and  suifering. 

The  World  War  may  be  conceived  as  a  vast  experiment  in 
international  finance,  conducted  at  the  cost  of  over  12  million  lives 
and  over  200  billion  dollars.  Its  lessons  should  be  an  open  book 
for  the  generations  to  come.  England,  France  and  Germany 
utilized  three  different  methods  in  financing  the  war.  The  con- 
sequences in  each  of  these  countries  are  a  foil  to  the  conflicting 
theories  of  war  finance,  advanced  during  the  struggle.  The  results 
test  the  hypotheses. 

A  knowledge  of  the  history  and  diagnosis  of  the  financial 
ills  of  Europe  are  essential  to  the  determination  of  the  prognosis 
and  the  therapy.  The  present  chaos  in  Europe  can  be  understood 
only  in  the  light  of  its  causes,  and  the  possible  way  out  is  to  be 
found  only  by  studying  the  effects  of  war-time  finance. 

The  aim  of  this  book  is  to  present  a  concise  account  of  the 
financial  changes  in  Europe  during  and  since  the  war,  and  a  sum- 
mary of  the  proposals  for  financial  reconstruction.  It  covers  the 
period  from  1914  to  1921  and  treats  the  questions  of  foreign  ex- 
change, banking  and  public  finance  with  reference  to  the  three 


viii  PREFACE 

major  belligerents.  The  methods  of  war  finance  are  compared 
and  appraised,  and  an  attempt  is  made  to  outline  the  prospect,  and 
the  measures  taken  or  recommended  to  hasten  the  return  of  stable 
conditions.  The  ending  of  the  war  has  made  it  possible  to  discuss 
scientifically  and  assess  impartially  questions  on  which  war  loyal- 
ties warped  the  judgment. 

Countries  other  than  Great  Britain,  France  and  Germany  are 
considered  only  incidentally.  Except  in  the  discussion  of  exchange 
rates  in  the  United  States,  our  own  country  is  not  included,  chiefly 
because  most  American  readers  are  more  or  less  familiar  with  the 
methods  and  effects  of  its  financing  of  the  war  and  because  the 
United  States  has  not  been  as  seriously  affected  as  the  European 
belligerents,  and  the  burden  of  its  debt  is  not  impossible  to  bear. 
Our  after-war  financial  problem  involves  not  a  doubt  as  to  the 
possibility  of  a  solution,  but  rather  a  choice  of  procedures. 

It  is  hoped  that  the  book  will  be  of  value  to  those  interested 
in  public  and  private  finance,  either  as  students  or  as  business  men. 
The  volume  is  the  last  of  the  series  of  studies  on  the  economic 
effects  of  the  war,  written  by  the  author  as  a  result  of  a  conver- 
sation in  November,  191 7,  with  Mr.  John  Macrae.  It  was  written 
during  seven  months  of  retirement  and  after  a  considerably  longer 
period  of  gathering  of  material. 

Grateful  acknowledgment  is  made  of  obligation  to  Professors 
H.  C.  Adams  of  the  University  of  Michigan,  T.  S.  Adams  of  Yale 
University,  and  E.  L.  Bogart  of  the  University  of  Illinois,  to 
whom  the  writer  submitted  an  analytical  outline  of  the  collected 
material  in  the  summer  of  1920  in  Washington  and  who  urged 
him  to  write  the  book.  Thanks  for  comm.ent  and  valuable  sug- 
gestions concerning  the  manuscript  are  due  to  Professors  E.  R.  A. 
Seligman  and  E.  L.  Bogart,  and  to  Mr.  L.  R.  Gottlieb,  in  the 
section  on  public  finance;  to  Professors  H.  Parker  Willis  and 
Harold  G.  Moulton,  in  the  section  on  banking,  to  Mr.  Fred  I. 
Kent,  vice-president  of  the  Bankers  Trust  Company  and  during 
the  war  Director  of  the  Division  of  Foreign  Exchange  of  the 
Federal  Reserve  Board,  and  to  Dr.  Raleigh  S.  Rife,  economist  of 
the  Guaranty  Trust  Company  in  the  section  on  foreign  exchange, 
and  to  my  colleague  Professor  Charles  W.  Gerstenberg  of  New 
York  University  for  general  suggestions.  The  chapters  dealing 
with  each  of  the  three  countries  were  submitted  for  criticism  to 


PREFACE  IX 

representatives  of  these  governments,  then  In  the  United  States, 
Mr.  John  Joyce  Broderick,  and  Mr.  H.  C.  A.  Carpenter,  respect- 
ively Commercial  Counsellor  and  Commercial  Secretary  of  the 
British  Embassy  at  Washington;  Mr.  J.  A.  M.  DeSanchez,  Di- 
rector of  the  Division  of  Economics  of  the  French  Commission  in 
the  United  States,  and  Mr.  Ludwig  Bendix,  Chief  of  the  Division 
of  Foreign  Exchange  of  the  German  Ministry  of  Economics.  How- 
ever, the  views  expressed  are  the  author's  alone.  The  author  is 
indebted  to  Undersecretary  of  the  Treasury,  S.  P.  Gilbert,  Jr.; 
Ex-Assistant  Secretary  N.  Kelley;  Mr.  John  Foster  Dulles,  some- 
time legal  adviser  to  the  American  Commission  to  Negotiate 
Peace;  Mr.  Carl  Snyder,  Statistician  of  the  Federal  Reserve  Bank 
of  New  York;  Dr.  C.  E.  McGuire  of  the  Inter-American  High 
Commission;  Dr.  Arthur  N.  Young  of  the  State  Department;  to 
Mr.  Malcolm  C.  Rorty  of  the  American  Telegraph  and  Tele- 
phone Company  who  kindly  read  portions  of  the  material,  and 
to  Mr.  C.  C.  Latour  of  the  American  International  Corporation, 
who  was  good  enough  to  read  the  galley  proof.  However,  none 
are  to  be  held  accountable  for  the  statements  of  fact  or  opinion 
in  the  book. 

For  the  use  of  the  illustrations,  the  author  is  indebted  to  Pro- 
fessor Wesley  C.  Mitchell's  "International  Price  Comparisons," 
(for  Figures  I,  II  and  III),  and  to  the  editors  of  the  Harvard 
Review  of  Economic  Statistics,  (for  Figures  VI,  VII,  IX  and  XI), 
of  the  Monthly  Review  of  the  Federal  Reserve  Bank  of  New 
York  (for  Figures  IV,  XXI  and  XXII),  of  the  Federal  Reserve 
Bulletin,  (for  Figures  V,  VIII,  X,  XII,  XIV,  XVI  and  XVII), 
and  to  the  Secretary  of  the  War  Finance  Corporation,  (for  Figures 
XIII,  XV,  XVIII,  XIX  and  XX).  For  cooperation  in  the  col- 
lection of  material,  acknowledgment  is  made  of  the  aid  of  Mr. 
Wesley  Frost,  sometime  Acting  Foreign  Trade  Adviser  in  the 
Department  of  State  and  Mr.  M.  L.  Jacobson,  Statistician  of  the 
Federal  Reserve  Board,  former  colleagues  of  the  author  on  the 
Economic  Liaison  Committee  of  the  Federal  Government  Depart- 
ments, and  of  the  aid  of  Dr.  Henry  J.  Harris  of  the  Division  of 
Documents  of  the  Library  of  Congress,  and  of  the  staffs  of  the 
library  of  the  Federal  Reserve  Board  at  Washington,  of  the  Guar- 
anty Trust  Company,  of  New  York  University,  and  of  the  Di- 
vision of  Economics,  Statistics  and  Public  Documents  of  the  New 


X  PREFACE 

York  Public  Library.  Not  least  are  sincere  thanks  due  to  a  few- 
friends,  who  subscribed  to  advance  copies  to  the  number  required 
by  the  publishers. 

E.  M.  F. 

14  Wall  Street, 
October  25,  1921. 


Note:  Where  dollar  equivalents  of  foreign  currencies  are  given,  the 
conversion  is  at  mint  parity,  unless  otherivise  specified.  The  footnotes 
refer  to  collateral  readings  as  <well  at  to  sources  of  data  in  the  text. 


CONTENTS 


SECTION  A 
THE  EFFECTS  OF  THE  WAR 

Part  I. — Public  Debt  and  Taxation 

CHAPTER  PAGE 

I.  Principles  and  Practice  in  the  World  War i 

II.  British  Public  Finance 57 

III.  French   Public   Finance 93 

IV.  German  Public  Finance 135 

Part  II. — Currency  and  Credit 

V.  Principles  and  Practice  in  the  World  War 173 

VI.  British  Currency  and  Credit 193 

VII.  French  Currency  and  Credit 219 

VIII,  German  Currency  and  Credit 258 

Part  III. — Foreign  Exchange 

IX.  Principles  and  Practice  in  the  World  War 291 

X.  British    Foreign    Exchange 405 

XI.  French   Foreign    Exchange 432 

XII.  German  Foreign  Exchange 449 


SECTION  B 
FACTORS   IN  THE   FINANCIAL  REORGANIZATION 

XIII.  The   Capital    Levy 485 

XIV.  National  Bankruptcies  in  the  Nineteenth  Century 523 

XV,  The  Inter-Allied  Debts— Shall  They  be  Cancelled? 539 

zi 


XU  CONTENTS 

PAGE 

XVI.  The  German  Indemnity 585 

XVII.  The   Foreign   Exchanges 610 

XVIII.  The  Brussels   Financial   Conference 617 

XIX  International  Loans  for  the  Restoration  of  Europe 63S 

XX.  New  York  and  London  as  Financial  Centers 658 

Bibliography   675 

Index  of  Authors 691 

Subject  Index 695 


Analytical  Table  of  Contents 


SECTION  A 

THE  EFFECTS  OF  THE  WAR 

PART  I 

PUBLIC  DEBT  AND  TAXATION 

CHAPTER  I 
PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 

PAGE 

A.  The  Theory  of  War  Finance i 

i.  Goods  versus  Credit 
ii.  Inflation 

a.  Causes  of  Inflation 

b.  The  Nature  of  Inflation 

c.  The  Results  and  Evils  of  Inflation 

iii.  The  Burden  of  the  Present  or  the  Future  Generation 
iv.  Taxes  versus  Loans 

a.  Loans 

1.  The  Argument  for  Bonds 

2.  The  Argument  against  Bonds 

3.  Effects  of  Loan  Policy  in  War  of  1812 

b.  Taxation 

1.  The  Argument  for  Taxes 

2.  The  Argument  against  Taxes 

3.  Conclusion 

c.  Combination  of  Loans  and  Taxes 

1.  The  Theory 

2.  The  Practice 

B.  National  Wealth  and  War  Debts 18 

i.  National  Wealth 
i\.  Real  Wealth  and  the  Paper  Debt 
iii.  The  Future  Outlook 

xiii 


xiv  ANALYTICAL  TABLE  OF  CONTENTS 

PAGE 

C.  Statistics  of  Public  Finance 25 

i.  National  Wealth  and  Income 
ii.  Growth  of  Public  Debt  of  the  Nations 
iii.  The  Cost  of  Previous  Wars 
iv.  Growth  of  World  Revenue 

D.  Total  Cost  of  the  War ..ajui...    3« 

i.  Errors  in  Estimating  the  Cost 

a.  The  Time  Factor 

b.  The  Currency  Factor 

c.  The  Administrative  and  AccouDtlng  Factors 

d.  International  Aspects 

ii.  The  Direct  Costs  of  the  War 

a.  The  Total  Direct  Cost 

b.  Loans 

1.  Public  Debt  of  Belligerents 

2.  Debt  Charges 

3.  Per  Capita  Debt 

4.  Debt  and   National  Wealth;    Debt  Charges  and   Na- 

tional Income 

5.  Inter-Allied  Loans 

c.  Taxes 

1.  Ratio  of  Taxes  to  Expenditure 

2.  Total  Taxes  and  War  Taxes  Per  Capita  Per  Annum 

3.  Sources  of  Revenue  and  Relative  Increases  in  Taxes 

a.  Direct  taxes  to  total  taxes 

b.  Relative  increase  in  direct  taxes 

c.  Relative  increase  in  total  receipts 

d.  Ratio  of  total  taxes  to  expenditures 

d.  Increase  in  Note  Circulation 
iii.  Indirect  Costs  of  the  War 

a.  Loss  of  life 

b.  Loss  of  Property 

c.  War  Relief 

d.  Losses  of  Neutrals 

e.  Loss  of  Currant  Wealth 

f.  Social   Unrest 

g.  Total  Indirect  Costs 
h.  Compensations 

CHAPTER  II 
BRITISH  PUBLIC  FINANCE 

A.  Pre-War  Situation  and  Cost  of  the  War 57 

B.  Loans  60 

i.  Ways  and  Means  Advances 

ii.  Treasury  Bills 
iii.  Exchequer  Bonds 
iv.  Long-Term  Bonds 

a.  Inducements  to  Subscribe 

b.  Control  of  Capital  Issues 


ANALYTICAL  TABLE  OF  CONTENTS  XV 

PAGE 

1.  Procedure 

2.  EflFects 

V.  War  Savings  Certificates 
vi.  Foreign  Borrowings 

a.  Unsecured  Loans 

b.  Treasury  Bills 

c.  Mobilization  of  Securities 

d.  Secured  Loans 

e.  Financial   Impasse 

f.  United  States  Government  Advances 

g.  Loans  to  Allies  and  Dominions 
h.  Total  Foreign  Borrowings 

C.  Taxes    74 

1.  The  Taxation  Policy 
ii.  Direct  Taxes 

a.  Income  Tax 

b.  Excess-Profits  Tax 
ill.  Indirect  Taxes 

a.  Customs  and  Excise  Taxes 

b.  Consumption  and  Luxury  Taxes 

c.  Non-Tax  Revenues 

D.  Problems  of  the  Post- War  Budget 78 

i.  Comparison  of  Pre-War  and  Post-War  Budgets 
ii.  Meeting  the  Deficit 

a.  Extent  and  Cause  of  the  Deficit 

b.  Wiping  Out  the  Deficit 
iii.  Maturing  and  Floating  Debt 

E.  An  Appraisal  of  British  War  Finance 85 

i.  Availability  of  Funds 

a.  Moderate  Rise  of  Interest  Rates 

b.  No  Lottery  Loans  Issued 

ii.  Fiscal  Policy  Unchanged  Throughout  the  War 
iii.  Democratic  versus  Militaristic  Finance 
iv.  The  Outlook 

a.  A  Retrospect 

b.  The  Prospect 

CHAPTER  III 
FRENCH  PUBLIC  FINANCE 

A.  Pre- War  Situation  93 

B.  Loans    95 

i.  Cost  of  the  War 
ii.  Analysis  of  the  Public  Debt 

a.  Growth  of  the  Debt  Analyzed 

b.  Anal3'sis  of  the  Total  Debt 
iii.  Advances  from  the  Bank  of  France 
iv.  Short-Term  Loans 

V.  Long-Term  Loans 


Xvi  ANALYTICAL  TABLE  OF  CONTENTS 

PAGE 

vi.  Foreign  Borrowing 

a.  Long  and  Short-Terra  Loans 

b.  Analysis  of  the  Foreign  Debt 

c.  Offset  to  Foreign  Borrowing 

C.  Taxes   109 

i.  Principles  and  Policies 

a.  Analysis  of  Revenues 

b.  French  and  British  Taxes  Compared 

c.  The  Amount  of  War  Taxes  and  Percentage  of  Total  Cost 

d.  Diversity  of  Taxes 

e.  Criticism  of  Tax  Policy 

f.  An  Apology  for  the  Tax  Policy 
ii.  The  Income  Tax 

iii.  Profits   Taxes 

iv.  Indirect  and  Other  Taxes 

D.  The  Post- War  Budget 117 

i.  Sections  of  the  Budget 
ii.  The  Budget  of  1920 
iii.  Tax  Increases 

E.  Appraisal  of  French  War  Finance 123 

i.  Facts 
ii.  The  Effects  of  French  Financial  Policy 

a.  Bank  of  France  Advances 

b.  Short-Term  Loans 

c.  Long-Term  Loans 

d.  Taxes 

e.  Change  of  Fiscal  Policy 
iii.  The  Causes  of  the  Difficulty 

a.  Bad  Pre-W^ar  Situation 

b.  The  Theory  of  a  Short  War 
iv.  The  Remedy 

V.  The  Outlook 

a.  The  Indemnity 

b.  The  Future  Budget  ^ 

c.  The  French  Diagnosis 

d.  The  American  View 

CHAPTER  IV 
GERMAN  PUBLIC  FINANCE 

A.  Cost  of  the  War  and  Public  Debt 135 

i.  National  Wealth  and  National  Debt  before  the  War 

ii.  The  War  Debt  of  the  States  and  Cities 
iii.  The  Growth  of  the  Debt 
iv.  Total  Debt  Analyzed 

B.  Loans 140 

i.  The  Theory  of  German  War  Finance 
ii.  The  Mobilization  of  Credit,  an  Accessory  to  the  Loan  Policy 


ANALYTICAL  TABLE  OP  CONTENTS  XVll 

PAG8 

ii!.  The  Issue  of  Loans 

a.  The  Restriction  of  Capital  Issues 

b.  Terms  of  Loans 

c.  The  Lottery  Loan 

C.  War-Time   Taxation    146 

i.  Taxation  Policy 
li.  Principles  of  Taxation 
iii.  Taxes  Enacted 

a.  War  Increment  Tax 

b.  Company  Profits  Tax 

c.  Other  Federal  Taxes 

d.  Non-Federal  Taxes 

D.  The  Budget  149 

i.  Total  Requirements 
ii.  Deficits 
iii.  Budget  Comparisons 

E.  The  Appraisal  of  German  War  Finance 155 

i.  The  Debt 
ii.  Taxation 

F.  Taxation  After  the  Armistice 157 

i.  Indirect  Taxes 
ii.  Direct  Taxes  on  Income  and  Profits 

a.  Taxes  on  Income 

b.  Taxes  on  Income  from  Investments 

c.  Taxes  on  War-Time  Increases  of  Income 

d.  Taxes  on  Corporate  Profits 
iii.  Property  Taxes 

a.  Recurrent  Levy  on  Increases  of  Wealth 

b.  Inheritance  Tax 

iv.  The  Effect  of  Heavy  Taxation 

a.  The   Flight  of   Capital 

b.  The  Effects  of  the  Flight  of  Capital 
C.  Counter  Measures 

1.  The  Restriction  of  Emigration 

2.  The  Control   of  the  Export  of  Capital 

3.  The  Issue  of  New  Money 

4.  Bank  Control  of  Income  from  Investments 

G.  The  Outlook   167 

i.  Further  Inflation  and  Bankruptcy  Proposed 
ii.  Increasing  the  National  Revenue 
iii.  Germany's  Losses 
iv.  Prerequisites  for  Payment  of  Indemnity 


XVm  ANALYTICAL  TABLE  OF  CONTENTS 

PART  II 
CURRENCY  AND  CREDIT 

CHAPTER  V 
PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 

PAGE 

A.  Inflation  and  the  Central  Banks 173 

i.  How  Inflation  is  Produced 
ii.  Peace  Conditions  vs.  War  Conditions 

B.  Government  Bank  Statements 175 

i.  Changes  in  Statements  of  Banks  of  Neutral  and  Belligerent 

States 
ii.  Changes  in  the  Items  on  Bank  Statements 

C.  Effects  of  Inflation  on  Prices i8i 

D.  Prospects  and  Remedies 188 

i.  The  Prospect 
ii.  Policies 

a.  Credit  and  Currency  Before  and  During  the  War 

b.  Post-War  Policies 

CHAPTER  VI 
BRITISH  CURRENCY  AND  CREDIT 

A.  The  Bank  of  England,  Development  and  Organization 193 

B.  Wartime  Legislation  and  Expedients 195 

i.  The  Moratorium 
ii.  Suspension  of  the  Bank  Act 
iii.  Issue  of  Currency  Notes 

C.  The  Bank  of  England  During  the  War 198 

i.  The  Bank  Statement  and  the  Currency  Situation 
ii.  Changes  in  the  Bank  of  England  Statement 

D.  Effects  of  Inflation 207 

i.  Increase  of  Prices 

ii.  Increase  of  Wages 
iii.  Premium  on  Gold 
iv.  Increase  in  Accounts  of  Private  Banks 

E.  Post- War  Policy 211 

i.  Efficacy  of  Bank  Act  Before  the  War 
ii.  The  Breakdown  of  the  Bank  Act  During  the  War 
iii.  The  Prerequisites  for  the  Restoration  of  the  Gold  Standard 

a.  Cessation  of  Government  Borrowing 

b.  The  Utilization  of  the  Discount  Rate 
Limitation  of  the  Fiduciary  Issue 

iv.  Maintenance  of  the  Bank  Charter  Act  of  1844 


ANALYTICAL  TABLE  OF  CONTENTS  XIX 

CHAPTER  VII 
FRENCH  CURRENCY  AND  CREDIT 

PAGE 

A.  The  History  of  French  Banking 219 

i.  Development  of  the  Bank  of  France 
ii.  Organization  and  Functions  of  the  Bank  of  France 

a.  Ownership  and  Control 

b.  Rate  of  Discount 

c.  Private  Banks 

d.  Notes  vs.  Deposit  Credit 

e.  Foreign  Investments 

B.  War-Time   Financial   Legislation 1224 

i.  The  Moratorium 

ii.  Suspension  of  Specie  Payment  and  the  Issue  of  Legal  Tender 
Notes 

C.  War  Operations  of  the  Bank  of  France 226 

i.  Changes  in  the  Statement  of  the  Bank  of  France 
ii.  Gold  Policy 

a.  The  Pre-War  Conditions 

b.  The  Effect   of   the  War 

c.  An  Appraisal  of  the  French  Gold  Policy 
iii.  Advances  to  the   State 

a.  Terms  of  Advances 

b.  Relative  Importance  of  Advances  to  the  State 

c.  Advances  to  Foreign  Governments 

d.  Repayment  of  Government  Advances 

e.  Advances  after  the  Armistice 

f.  Amortization  Fund 
iv.  Loans  and  Discounts 

a.  Decline  During  the  War 

b.  The  Rates  of  Discount 
V.  Moratorium  Bills 

vi.  Notes  in  Circulation 

a.  Terms  of  Issue 

b.  Forms  of  Issue 

c.  The  Continuous  Increase  in  Volume 
vii.  Minor  Operations  of  the  Bank  of  France 

D.  The  Effects  of  Inflation 242 

i.  The  Rise  in  Prices 
ii.  Economic  Disturbances 
iii.  Depreciation  of  Foreign  Exchange 
iv.  Premium  on  Specie 
V.  Shortage  of  Specie  and  Demonetization 
vi.  Issue  of  Paper  Money  of  Small  Denominations 
vii.  The  Disruption  of  the  Latin  Monetary  Union 
viii.  Popularization  of  Checks 
ix.  Private  Banks  Affected 

E.  The  Outlook  254 

i.  The  Expansion  of  Production  to  Absorb  the  Increased  Currency 
ii.  Deflation  of  the  Currency 


XX  ANALYTICAL  TABLE  OF  CONTENTS 

PAGE 

iii.  Analogy  of  the  Civil  War 
iv.  Possible  Remedy 

CHAPTER  VIII 

GERMAN  CURRENCY  AND  CREDIT 

A.  History  of  the  Reichsbank 258 

i.  Development  of  the  Central  Bank 
ii.  Organization  and  Function  of  the  Reichsbank 
iii.  Control  and  Concentration  of  Gold  Supply 

B.  War  Legislation,  Policy  and  Expedients 260 

i.  Suspension  of  Specie  Payment 

ii.  Imperial  Treasury  Notes  Issued 
iii.  Increased  Issue  of  Reichsbank  Notes 
iv.  New  Institutions  to  Create  Credit 

V.  Moratorium 

C.  Operations  of  the  Reichsbank  During  the  War 264 

i.  Gold  Policy  of  the  Reichsbank 

a.  Changes  in  Gold  Holdings  During  the  War 

b.  War  Measures  to  Increase   Gold  Holdings 
ii.  Commercial  Bills  and  Discounted  Treasury  Bills 

a.  Intermittent  Increases  up  to  the  Armistice 

b.  Great  Increases  After  the  Armistice 
iii.  Note  Issues 

a.  Increases  by  Years 

b.  Analysis  of  Total  Notes  in  Circulation 

c.  The  Causes  of  the  Increase  in  Note  Circulation 

d.  Measures  for  Relieving  the  Lack  of  Currency 

1.  Note  Issues  by  Towns  and  Chambers  of  Commerce 

2.  The   Use  of  Interest  Coupons 

3.  Private  Printing  Establishments   Utilized 

e.  Loan  Bureau  Notes,  Darlehnskassenscheine 

f.  Imperial  Treasury  Notes,  Reichskassenscheine 
iv.  Deposits 

D.  Effects  of  Inflation 279 

i.  Depreciation  of  Currency 
ii.  Rise  in  Prices 

a.  Course  of  Rise 

b.  Extent  of  the  Rise 

c.  The  Lag  in  Wages  and  Cost  of  Living 
iii.  The  Increase  of  Deposits  and  Profits 

a.  The  Reichsbank  Turnover  and  Profits 

b.  The  Effect  on  the  Private  Banks 

c.  Increase  of  Savings  Banks  Deposits 

d.  Increased  Profits  in  Industry 

E.  The  Outlook , . .  287 

1.  Gradual  Deflation  not  Feasible 

ii.  The  Position  under  Depreciated  Paper 
iii.  Internal  Measures  as  Remedies 
iv.  Allies'  Policies  as  Remedies 


ANALYTICAL  TABLE  OF  CONTENTS  300 

PART  III 
FOREIGN  EXCHANGE 

CHAPTER  IX 
PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 

A.  The  Theory  of  Foreign  Exchange 291 

i.  Determinants  of  Exchange  Rates 

a.  Commodity  Movements 

b.  The  Flow  of  Capital 

c.  Remittances  of  Funds 

d.  Drafts  for  Services  Performed 

e.  Summary 

ii.  The  Trade  Balance  of  the  United  States 
iii.  History  of  the  Trade  Balance  of  the  United  States 

a.  Resume 

b.  The  Pre-War  Period 

c.  The  War  Period 

d.  The  Outlook 
iv.  Arbitrage 

a.  High  Rates  in  Copenhagen 

b.  High  Rates  in  New  York 
V.  Correctives 

a.  Between  Countries  on  Gold  Basis 

1.  Changes  in  the  Gold  Supply 

2.  Changes  in  Rates 

3.  Changes  in  the  Volume  of  Goods 

b.  Between  Countries  on  a  Non-Gold  Basis,  If  Gold  Flows 

1.  Changes  in  Gold  Supply 

2.  Changes  in  Rates 

3.  Changes  in  the  Volume  of  Goods 

c.  Between   Countries  on  a  Non-Gold  Basis,  if  Gold  Does 

Not  Flow 

1.  Changes  in  Volume  of  Goods 

2.  Changes  in  Rates 

d.  Summary 

B.  Quotations    308 

i.  New  York  Rates  on  Allied  Powers  in  the  World  War 

a.  From  August,  1914,  to  April,  1917 

b.  From  April,   1917,  to  March,   1919 

c.  After   March,    1919 

ii.  New  York  Rates  on  Neutral  Powers 

a.  From  August,    1914,  to  April,   1917 

b.  From  April,  1917,  to  March,  1919 

c.  After  March,   1919 

iii.  Currency  of  the  Central  Powers 

a.  From  August,   1914,  to  April,   1917 

b.  During  the  Belligerency  of  the  United  States 

c.  After  July,  1919 


ANALYTICAL  TABLE  OF  CONTENTS 


PAGE 

C.  The  Causes  of  Exchange  Fluctuations 329 

i.  Commercial  Factors 

a.  Before  "Pegging"  Sterling 

b.  During  the  "Peg" 

c.  After  the  Release  of  the  "Peg" 
11.  Fiscal  Factors 

iii.  Political  and  Other  Factors 

D.  The  Effects  of  Depreciation  of  the  Foreign  Exchange 334 

i.  The  Self-Corrective  Effect  of  Depreciation 

a.  Commercial  Self-Correctives 

1.  Exports  are  Fostered 

2.  Imports  are  Checked 

3.  Explanation 

b.  Financial  Self-Correctives 

ii.  Denial  of  the  Self-Corrective  EflFects  of  Depreciated  Exchange 

a.  Commercial 

b.  Financial 

iii.  Reconciliation  of  the  Apparently  Conflicting  Facts 

a.  Commercial  vs.  Fiscal  Causes  of  Depreciation 

b.  Relation  between  Fall  of  Exchange  and  Rise  of  Prices 
iv.  The  Unsettling  Effect  of  Unstable  Exchange  Rates 

a.  Commercial 

b.  Financial 

V.  The  Increased  Importance  of  Dollar  Exchange 

a.  Wider  Arbitrage  Transactions 

b.  Development  of  Dollar  Exchange 

E.  The  Correctives  of  Foreign  Exchange 345 

I,  Commodity  Movements 

a.  During  the  War 

b.  After  the  War 
ii.  Flow  of  Gold 

a.  Prior  to  the  War 

b.  Flow  of  Gold  During  the  War 

1.  Before  the  Belligerency  of  the  United  States 

2.  The  Flow  of  Gold  Under  the  Embargo 

c.  The  Flow  of  Gold  After  the  War 

1.  Lifting  of  the  Embargo 

2.  The  Effects  of  the  Lifting  of  the  Embargo 
iii.  The  Resale  of  American  Securities 

a.  Railorad  Shares 

b.  Industrial  Securities 

iv.  Sales  of  European   Securities 

a.  Industrial    Stocks 

1.  Royal  Dutch  Shares 

2.  "Shell"  Shares 

3.  Rand  Shares 

4.  De  Beers  Shares 

b.  Internal  Bonds  of  Governments  and  Municipalities 
V.  Loans 

a.  Short-Term  Bills 

1.  Under  Normal  Conditions 

2.  Treasury  Bills 


ANALYTICAL  TABLE  OF  CONTENTS  XXIU 

PAGE 
3.  Bank  Balances 
b.  Long-Term  Loans 

1.  Floated  Before  the  Armistice 

2.  Floated  After  the  Armistice 

3.  Investment  Trusts 

a.  European   Investment  Trusts 

b.  American  Investment  Trusts 

4.  The  War  Finance  Corporation 

5.  Edge  Law  Corporations 

a.  The   Law 

b.  Companies  Formed 

vi.  The  Control   of  the   Movement  of  Capital 

a.  Control  of  the  Movement  of  Capital  in  the  United  States 

b.  Control   of  the  Movement  rf   Capital   by  Foreign   Coun- 

tries 

Stabilization  of  the  Allied  Exchange  in  New  York 371 

i.  Mechanism  of  the  "Peg" 

a.  United   States   Government  Advances  to  the  Allies 

1.  The  Law 

2.  The  Amounts 

3.  The  Form  of  the  Debt 

4.  The  Rate  of  Interest 

5.  Maturity  of  the  Principal 

b.  The  Expenditures  of  the  United  States  Army  Abroad 

c.  Credits    for    the    Purchase    of    Army    Property    and    of 

Guaranteed  Wheat 

d.  British  Treasury  Bills 

e.  Licensing  of  Dealers  in  Exchange 
ii.  The  Effects  of  the  "Peg" 

a.  The  Effect  on  the  Allied  Powers 

1.  The  Maintenance  of  an  Artificial  Level 

2.  The  Failure  of  the  Self-Correctives 

3.  Financial  Weakness  Concealed 

4.  Strengthening  of  British  Prestige 

a.  Sales  of  Sterling  between  United  States  Dealers 

b.  Sale:,  of  Sterling  by  Foreign  Holders 

c.  Britisii  Operations  in  Neutral  Currencies 

b.  Effect  on  Neutrals 
X.  Trade  Currents 

2.  Difficulties  in  Allied  Settlements  for  Trade  Balances 

3.  Arbitrage  in  Allied  Exchanges 

a.  Mode  of  Operation 

b.  The  Defeat  of  the  Aim  of  Stabilization 

c.  The  Effect  of  Arbitrage 

4.  Heavy  Flow  of  Gold  to  Neutrals 
C.  The  Effect  on  the  United  States 

1.  Depreciation  of  Dollars 

2.  American  Paymaster  for  the  Allies 

3.  Gold  Embargo 

4.  Commercial  Effects  of  the  "Peg" 

iii.  Correctives    of    the     Depreciation     of     the     Dollar    on     Neutral 
Markets 
a.  Proposed  Correctives 


XXIV  ANALYTICAL  TABLE  OF  CONTENTS 


PAGE 

1.  The  Prohibition  of  Arbitrage 

2.  The  Tax  on  Exports  to  Neutrals 

3.  A  Federal  Reserve  Foreign  Bank 

b.  Fundamental   Difficulty 

1.  Impossibility  of  Trade  Settlement 

2.  Unavailability  of  Securities 

3.  Insufficiency  of  Gold 

c.  Correctives  in  Effect 

1.  Borrowings  by  the  United  States 
a.  The  Law 

h.  Loans  Negotiated 
/.  Neutrals  of  Europe 
X.  Spain 
y.  Switzerland 
z.  Scandinavian  Countries 

2.  Neutrals  of  South  America 
X.  Argentina 

y.  Other   Countries 

3.  Japan 

2.  Borrowing  by  the  Allies 

a.  Spanish  Loans  to  France 

b.  Argentine  Loans  to  Allies 

d.  The  Effects  on  Rates 

G.  The  Abandonment  of  Stabilization  Expedients 396 

i.  Decontrol  of  Exchange 
ii.  Reasons  for  the  Release  of  the  'Teg" 

a.  Inability  to  Obtain  Credit 

b.  The  Need  for  Return  to  Normal  Conditions 
iii.  Effects  of  the  Release  of  the  "Peg" 

a.  The  Sharp  Decline  of  Exchanges  in  New  York 

b.  The  Effect  on  Trade 

c.  The  Effect  on  the  Gold  Market 

d.  The  Continued  Liquidation  of  Securities 

CHAPTER  X 
BRITISH  FOREIGN  EXCHANGE 

A.  Causes  of  Depreciation 405 

i.  The  Nature  of  the  Fluctuations 
ii.  Merchandise  Balance  of  Trade 
iii.  The  Decline  of  Invisible  Credits 
iv.  Loans  to  the  Allies 

a.  During  the  War 

b.  After  the  War 

c.  Sterling  Remained  the  World's  Currency 

d.  The  Palliative  Character  of  Loans 
V.  Inflation 

B.  The  Effects  of  Depreciation 410 

C.  Correctives  of  Depreciated  Exchange 411 

i.  Merchandise  Shipments 


ANALYTICAL  TABLE  OF  CONTENTS  XXV 

PAGE 
ii.  Gold  Shipments 

a.  Amounts 

b.  The  Embargo 
iii.  The  Flow  of  Capital 

a.  The  Resale  of  American  Securities 

1.  The  Procedure  of  the  Dollar  Securities  Committee 

2.  Amounts  Mobilized  During  the  "Peg" 

3.  Sales  After  the  Release  of  the  "Peg" 

b.  Sales  of  European  Securities 
c  Foreign  Borrowing 

1.  Restrictions  on  the  Exportation  of  Capital 
a.  The  Method  and  Effect 

h.  The  Removal  of  Restrictions 

2.  Long-Term  Loans 

3.  United  States  Government  Advances 

4.  Treasury  Bills  and  Short-Term  Credits 
a.  United  States 

h.  Japan 

c.  Neutral  Europe 

d.  Argentina 

5.  Preferential  Discount  Rate 
iv.  Other  Correctives 

D.  The  Invisible  Balance  of  Trade 426 

i.  Foreign  Investments 
ii.  War-Time  Changes  in  Invisible  Credits 

a.  Investments 

b.  Shipping  Earnings 

c.  Other  Earnings 

d.  Recapitulation 

CHAPTER  XI 
FRENCH  FOREIGN    EXCHANGE 

A.  Trade  Balance 432 

i.  Total  Investments 

ii.  Classification  by  Countries 

iii.  Foreign  Loans  and  Borrowings  During  the  War 

iv.  The  Post-War  Position  of  France 

B.  The  Causes  of  Depreciation 435 

i.  Commercial  Causes 
ii.  Financial  Causes 
iii.  Fiscal  and  Currency  Factors 

C.  The  Effects  of  Depreciation 437 

i.  Commercial  Effects 
ii.  Financial  Effects 

a.  The  Breakdown  of  the  Latin  Monetary  Union 

b.  The  Effect  on  Foreign  Loans  and  Borrowing 

D.  Correctives  440 

i.  Commercial  Correctives 


3DCV1  ANALYTICAL  TABLE  OF  CONTENTS 

SAGB 

ii.  Gold  Shipments 
iii.  The  Flow  of  Capital 

a.  Restrictions  on  the  Export  of  Capital 

b.  Sale  of  Securities 

c.  Private  Borrowing  Abroad 
I.  Mobilization  of  Securities 

'<£.  Treasury  Bills  and  Credits  Opened 

a.  In  Great  Britain 

b.  In  the  United  States 

c.  Spain 

d.  Japan 

c.  In  Other  Countries 
3.  Long-Term  Borrowings 

d.  United  States  Government  Advances 

e.  The  "Pegging"  of  Foreign  Exchange 

CHAPTER  XII 
GERMAN  FOREIGN  EXCHANGE 

A.  Causes  of  the  Fluctuation 450 

i.  Trade  Causes 

a.  Excess  of  Merchandise  Imports 

b.  Loss  of  Invisible  Credits 
ii.  Financial  Causes 

a.  Sales  of  Marks  by  Foreigners 

b.  Maturing  Loans 

c.  Flight  of  Capital 
iii.  Monetary  Causes 

iv.  Fiscal  Causes 
V.  Political   Conditions 

a.  Military  Factors 

b.  Internal  Disorders 

c.  International  Restrictions 

d.  International  Cooperation 

B.  The  Effects  of  the  Decline 457 

i.  The  Effects  on  Prices 

a.  The  Gap  Between  German  and  World  Prices 

1.  The  Facts 

2.  The  Effects 

a.  Rise  in  German  Prices 

b.  Inability  to  Deliver  Goods  for  Export 

c.  "Germany's  Clearance  Sale" 

b.  Price  Changes 

X.  The  Fall  in  Exchange  and  the  Rise  in  Prices 
2.  The  Rise  in  Exchange  and  the  Fall  in  Prices 

c.  Lower  Cost  of  Production 

d.\  Equalization  of  German  and  World  Prices 
ii.  Commercial  Effects 

a.  Stimulation  of  Exports 

b.  Foreign  Competition 

I.  In  the  Home  Markets 


ANALYTICAL  TABLE  OF  CONTENTS  XXVU 

PAGE 
2.  In  Foreign  Markets 
c.  Barter 
aii.  Financial  Effects 

a.  The  Rise  in  Price  of  Securities 

b.  Increase  in  Capital  Issues 

c.  Investment  by  Foreigners,  Economic  Penetration  and  the 

Remedy 

d.  Effect  on  German  Bonds  Abroad 

C.  Correctives  of  Depreciation 47a 

i.  Trade  Correctives 

a.  Self-Correctives 

b.  Trade  Policy 

c.  Barter  and  Refining  Credit 
ii.  Gold  Shipments 

iii.  The  Flow  of  Capital 

a.  Sale  of  Securities 

b.  Foreign  Speculation  in  Marks 

c.  Borrowing  by  Germany 

1.  Borrowing  in  Holland 

2.  Borrowing  in  Switzerland 

3.  Borrowing  in  other  Countries 
iv.  Control  of  the  Exchanges 

a.  Trade  Bills 

I.  Devisenordnung 

3.  Devisenbeschaffungsstelle 

3.  The  Reichsbank 

b.  Security  Dealings 

V.  Fiscal  and  Monetary  Correctives 


SECTION  B 
FACTORS   IN  THE   FINANCIAL  REORGANIZATION 

CHAPTER  XIII 

THE  CAPITAL  LEVY  IN  GREAT  BRITAIN  AND  OTHER 
COUNTRIES 

A.  Is  A  Levy  Necessary? 485 

i.  Distribution  of  Wealth 

ii.  Difficulty  in  Balancing  the  Budget 
iii.  The  Evils  of  High  Taxes 
iv.  Deflation  Increases  the  Burden  of  Taxation 

B.  The  Policy  in  Handling  the  Debt 487 

i.  The  Psychological  Factor 
ii.  Permanent  vs.   Maturing  Public  Debts 
iii.  The  Levy  on  Wealth 

C.  Principles  of  a  Capital  Levy 489 

i.  The  Problem  and  the  Proposed  Solution 


XXVUl         ANALYTICAL  TABLE  OF  CONTENTS 

PAGE 
ii.  A  Le\'y  on  Intangible  Capital 
iii.  A  Capital  Levy  Would  Supplement  the  Income  Tax 

D.  Misconceptions  Concerning  the  Levy 491 

i.  Capital  Levy  is  not  a  New  Proposal 
ii.  Capital  Levy  is  Not  Equivalent  to  Repudiation 

E.  The  Method  of  Payment 493 

i.  The  Difficulty  of  Valuation 

a.  The  Per  Cent  Assessable 

b.  Method  of  Valuation 
ii.  Graduation  and  Assessment 

iii.  Form  of  Payment 
iv.  Evasion 

F.  Advantages  and  Benefits  Expected  of  a  Levy 496 

G.  Objections  to  the  Capital  Levy 497 

i.  The  Analog^'  to  Military  Conscription  Erroneous 
ii.  The  Self-Corrective  Nature  of  a  Heavy  Debt 
iii.  Taxation,  a  Preferable  Solution 

a.  High  Taxes  are  Accepted  Facts 

b.  The  Tax  Burden   Inevitably   Declines 

c.  The  Capital  Levy  as  a  Form  of  Income  Tax 
iv.  Capital  is  More  Productive  in  Private  Hands 

v.  The  Fear  of  a  Repetition  of  a  Capital  Levy 
vi.  Administrative  Difficulties 

a.  Capital  not  as  Definite  a  Basis  as  Income 

b.  A  Large  Percentage  of  British  Property  Difficult  to  Assess 

c.  The  Adjustment  of  Errors 

d.  Fraud  and  Evasion 

vii.  The  Capital  Levy  a  Panacea  which  Delays  the  Real  Remedy 

H.  Objections  Answered 504 

i.  The  Ethical  Objection 

a.  The  Capital   Levy  is   Unjust 

b.  The  Capital  Levy  Constitutes  a  Breach  of  Faith 

c.  The  Levy  on  Capital  is  Discriminatory 
ii.  The  Economic  Objection 

a.  The  Levy  Will  Harm  Industry  and  Commerce 

b.  The  Levy  Will  Deter  Saving  and  Foster  Extravagance 
iii.  The  Administrative  Objection 

iv.  The  Danger  of  Repetition 

I.   The  War-Wealth  Levy 506 

i.  The  Justification  of  the  War-Wealth  Levy 
ii.  The  Objections  to  a  War-Wealth  Levy 
Hi.  The  War-Wealth  Levy  vs.  the  Capital  Levy 
iv.  The  Theory  and  Method  of  the  War-Wealtih  Levy 
V.  Conclusion  of  Committee  on  War-Wealth  Levy 

J.  Summary  511 

i.  In  Favor  of  the  Levy 
ii.  In  Opposition  to  the  Levy 
ilL  Official  Action 


ANALYTICAL  TABLE  OF  CONTENTS  XXIX 

PAGE 

K.  The  Capital  Levy  is  France 514 

i.  Theory 
ii.  The  Procedure 

L.  Capital  Levy  in  Germany 516 

i.  The  Discussion 

a.  In  Favor  of  a  Property  Levy 

b.  Against  a  Property  Lev>' 
ii.  The  Laws 

a.  Non-Recurrent  Levy  on  Total  Wealth 

b.  Non-Recurrent  Levy  on  War-Tirae  Increases  of  Wealth 

M.  Capital  Levy  in  Other  Countries 521 

CHAPTER  XIV 
NATIONAL  BANKRUPTCIES  IN  THE  NINETEENTH  CENTURY 

A.  The  Nature  of  National  Bankruptcies 523 

B.  Types  of  National  Bankruptcies 526 

i.  Default  on  Interest 

a.  Reduction  of  the  Rate  of  Interest 

b.  Deferment  of  Payment 

c.  Taxes  on  Interest 
ii.  Default  on  Principal 

a.  Postponement  of  Payment 

b.  Conversion  of  Principal 

c.  Reduction  of  the  Principal 

d.  Conversion  of  a  Gold  Debt  into  a  Paper  Debt 
iii.  Native  vs.  Foreign  Creditors 

C.  Consequences  and  Liquidation  of  National  Bankruptcy 530 

i.  Results  of  National  Bankruptcies 
ii.  Liquidation  of  National  Bankruptcy 

D.  Protection  of  Foreign  Creditors 533 

i.  Guarantees 

ii.  Intervention 
iii.  Protective  Committees 
iv.  International  Financial  Control 

V.  International  Court 

CHAPTER  XV 
THE  INTER- ALLIED  DEBTS— SHALL  THEY  BE  CANCELED? 

A.  Historic  Experience ^3^ 

B.  The  Extent  of  the  Debt 541 

C.  Types  of  Proposals 543 

i.  Partial  Cancellation 

a.  Cancellation  of  Interest  and  Payment  of  Principal 

b.  Cancellation  of  Loans  to  France 

c.  Partial  Cancellation  of  Loans  by  Great  Britain 


XXX  ANALYTICAL  TABLE  OF  CX)NTENTS 

PAGE 

ii.  Redistribution  of  the  Debts 

a.  Offsetting  Britain's  Borrowings  and  Debts 

b.  The  Exchange  of  Inter-Allied  Debts  for  German  Indem- 

nity Bonds 
c  Pooling  of  the  War  Debts 

1.  French  Proposals 

2.  Italian  Proposals 

3.  British  Proposals 

iii.  Complete  Cancellation  of  the  Inter-Allied  Debts 

a.  British  Proposals 

1.  History 

2.  By  Keynes 

3.  By  Home 

4.  By  Lloyd  George  and  Chamberlain 

b.  American  Proposals 

D.  The  Objections  to  Cancellation 554 

i.  American  and  Foreign  Opposition 
ii.  The  Justification  and  Benefits  Considered 

a.  Financial 

1.  Inability  to  Pay 

2.  Hugeness  of  the  Sum 

3.  Budget  Deficits 

4.  The   Unsettlement  of  Exchange  Rates 

5.  Relatively  Small  Sacrifices  of  the  United  States 

6.  Dumping  of  European  Goods 

b.  Political  Justifications 

1.  Payment  of  Indemnitj^  by  Victors 

2.  The  Cost  of  Crushing  Militarism 

3.  Imperiling  of  Peace 

iii.  Arguments   against   Cancellation 

a.  Heaviest  Loss  to  the  United  States 

b.  Crippling   of   International    Credit 

c.  Priority  of  Lien  of  Foreign  Creditors 

E.  Alternative  Proposals 57a 

i.  The  Intent 

a.  Loans  not  Subsidies 

b.  Military  Exigency  vs.  Financial  Prudence 
ii.  Impossibility  of  Cash  Payment 

a.  Effect  on  Exchange   Rates 

b.  Payment  in  Foreign  Securities 

c.  Payment     in  American  Territorial   Possessions 
iii.  Present  Course 

a.  The  Law 

b.  Deferment  of  Interest  Payments 

c.  Negotiations  bj-  the  Secretary  of  the  Treasury 
iv.  Ultimate  Course 

a.  Not  an  American  but  an  International  Problem 

b.  Cancellation  not  a  Panacea 

c.  Cancellation  not  an  Unconditional  Gift 

d.  Prerequisites  of  Settlement 

V.  The  Need  of  an  American  Foreign  Policy 


ANALYTICAL  TABLE  OF  CONTENTS  XXxi 

CHAPTER  XVI 
THE  GERMAN  INDEMNITY 

PAGE 

A.  The  French  Indemnity  of  1871 585 

i.  The  Facts 
ii.  A  Comparison  of  the  Indemnities  of  1871  and  1921 

B.  Estimates  of  Property  Damage 588 

C.  Proposed  Indemnity 590 

i.  Treaty  Provisions 

ii.  The  Hythe  Conference 
iii.  Boulogne  and  Spa  Conferences 
iv.  Paris  Conference 

V.  German  Proposals 
vi.  Final  Terms  Accepted  by  Germany 

D.  Method  of  Payment 598 

i.  Surrender  of  Property 
ii.  Payment  in  Kind 
iii.  Negotiable  Bonds 

E.  Criticism  603 

i.  Inability  to  Pay 
ii.  Inability  to  Receive  Payment 
iii.  Cost  of  Reparation 

F.  Conclusion    607 

CHAPTER  XVII 
THE  FOREIGN  EXCHANGES 

A.  The  Outlook 610 

i.  United  States:  Effect  of  Investments  Abroad 
ii.  Germany:  The  Effect  of  the  Indemnity 
iii.  International  Trade  Under  Depreciated  Paper 

B.  Correctives    614 

i.  Infeasible  Proposals 
ii.  Financial  Correctives 
iii.  Trade  Correctives 

CHAPTER  XVIII 
THE  BRUSSELS  FINANCIAL  CONFERENCE 

A.  The  Aim 617 

B.  The  Diagnosis 618 

C.  Memoranda  Submitted  by  Economists 620 

D.  Policies  Recommended 622 

i.  Condemnation  of  Impracticable  Proposals 
ii.  The  Abandonment  of  Certain  National  Policies 
iii.  Positive  National  Policies  Recommended 
iv.  The  Abandonment  of  Certain  International  Policies 
V.  Positive  International  Policies  Recommended 

E.  Text  of  the  Resolutions  Adopted 626 

F.  An  Appraisal  of  the  Conference v  63$ 


XXXU  ANALYTICAL  TABLE  OF  CONTENTS 

CHAPTER  XIX 
INTERNATIONAL  LOANS  FOR  THE  RESTORATION  OF  EUROPE 

PAGE 

A.  The  Need  for  Ikternatioxal  Loans 638 

B.  The  Prerequisite  and  Conditions  of  International  Loans 639 

C.  Proposed  Types  of  Loans 641 

i.  Loans  by  Government  or  an  International  Body 

a.  Keynes'  Proposal 

b.  Paish's  Proposal 

c.  Vanderlip's  Proposal 

d.  Proposals  of  Delacroix  and  PIgou 

e.  Proposals  of  Thalbitzer  and  Vissering 
ii.  Private  Loans 

a.  The  Views  of  Professor  Cassel 

b.  Proposal  of  Lehner 

D.  The  Ter-Meulen-Bruins  Plan 649 

i.  Bruins'  Outline 

a.  Criticism 

b.  The  Conditions  of  Loans 

c.  Private  Credits 

d.  Bruins'  Plan 

ii.  The  Ter-Meulen  Plan 

a.  Summary  and  Text 

b.  Recommendations 

c  Limitations  of  the  Scheme 

d.  An  Appraisal  of  the  Ter-Meulen  Plan 

CHAPTER  XX 
NEW  YORK  AND  LONDON  AS  FINANCIAL  CENTERS 

A.  Before  the  War 658 

i.  Geographical  Position 

ii.  Industrial  Maturity 
iii.  Transshipment  Trade 
iv.  Financial   Facilities 

V.  Political  and  Other  Factors 

B.  During  the  War 663 

i.  The  Decline  of  the  Jobbing  Trade 
ii.  The  Decline  in  Shipping 
iii.  Foreign  Exchange  Arbitrage 
iv.  The   Federal   Reserve   System   and   the  American  Acceptance 

Market 
V.  The  Depreciation  of  Sterling 
vi.  Other  Financial  Factors 

C.  After  the  War 66S 

i.  The  Restoration  of  Commercial  Prestige 
ii.  Restoration  of  Financial  Prestige 

D.  The   Outlook 671 

i.  Deficiencies  of  London 
ii.  Deficiencies  of  New  York 

Bibliography    675 

Index  of  Authors 691 

Subject  Index 695 


LIST  OF  CHARTS 


FIGURE  PAGE 

I.  Relative  Prices  before  the  War  in  United  States  and  England  183 

II.  Relative  Prices  before  the  War  in  United  States  and  France.  184 

III.  Relative  Prices  before  the  War  in  United  States  and  Germany  185 

IV.  Relative  Prices  during  the  War  in   United   States,   England, 

France  and  Italy   187 

V.  Operations  of  the  Bank  of  England  during  the  War 202 

VI.  Operations  of  the  Bank  of  England  after  the  Armistice 203 

VII.  British  Currency  Notes  and  Bank  of  England  Notes 207 

VIII.  Operations  of  the  Bank  of  France  during  the  War 228 

IX.  Operations  of  the  Bank  of  France  after  the  Armistice 229 

X.  Operations  of  the  Reichsbank  during  the  War 266 

XI.  Operations  of  the  Reichsbank  after  the  Armistice 267 

XII.  Exchange  Rates  in  New  York  on  Belligerent  Powers  during 

the  War 310 

XIII.  Exchange  Rates  in  New  York  on  formerly  Belligerent  Powers 

after   the   War 311 

XIV.  Exchange  Rates  in  New  York  on  Neutral  Powers  during  the 

War   316 

XV.  Exchange  Rates  in  New  York  on  formerly  Neutral   Powers 

after  the   War 317 

XVI.  Exchange  Rates  in  Switzerland  on  Berlin  and  Vienna  1914- 

1918    321 

XVII.  Exchange  Rates  in  New  York  on  Silver  Standard   Countries 

during  the  War 325 

XVIII.  Exchange  Rates  in  New  York  on  Silver  Standard  Countries 

after   the   War 326 

XIX.  Exchange  Rates  in  New  York  on  Balkan  Countries  after  the 

War  327 

XX.  Exchange  Rates  in  New  York  on  New  Countries  after  the 

War     328 

XXI.  Relation  Between  the  Fall  in  Exchange  and  the  Rise  in  Prices  340 
XXII.  Relation  Between  the  Depreciation  of  Exchange  and  Depre- 
ciation  of   Currency 341 


POSTSCRIPT 


Before  the  war,  the  world  functioned  as  an  economic  unit,  as 
a  single  organism.  During  the  war,  it  was  fractured,  economically. 
Both  groups  of  belligerents  and  the  overseas  neutrals  constituted 
three  practically  separate  economic  systems.  At  the  same  time, 
debts  were  greatly  increased  and  paper  money  was  printed  in  huge 
volume.  Since  the  war,  the  return  of  prewar  conditions  of  economic 
interdependence  and  of  stable  currencies  has  been  obstructed  by  the 
terms  of  the  peace.    And  therefore  the  world  suffers. 

Upon  what  sort  of  world  did  the  Great  War  break?  Essen- 
tially it  was  a  mobile  world,  an  organic  world.  The  world  in 
1914,  as  distinguished  from  previous  periods  of  great  wars,  was 
highly  interdependent.  Transportation  and  communication  on 
land,  over  and  under  the  sea  and  in  the  air,  by  steam  power, 
electricity  and  motor  oil,  knit  together  the  uttermost  ends  of  the 
earth.  News  was  simultaneously  published  in  distant  lands.  An 
insect  pest,  the  wheat  rust  or  the  boll  weevil,  was  no  longer  merely 
of  local  concern;  on  the  contrary  human  beings  in  foreign  parts 
were  deprived  of  food  and  raiment. 

Densely  settled  Europe  became  the  workshop  of  the  world. 
It  exported  finished  goods  to  overseas  regions,  and  imported  food 
and  raw  m.aterials.  The  competition  of  manufacturing  countries 
led  to  the  search  for  new  markets  and  for  new  sources  of  supply 
of  raw  materials.  And  out  of  this  seeking  resulted  the  colonial 
expansion  of  the  European  powers,  the  building  of  new  railroads, 
the  investment  of  foreign  capital  to  open  up  the  world's  wilder- 
nesses, which  were  to  furnish  both  more  raw  materials  and  more 
markets. 

Trade  was  fairly  unrestricted.  The  little  nations,  Switzer- 
land, Holland  and  Belgium,  did  an  extensive  transshipment  trade 
for  the  great  powers.    The  great  manufacturing  nations  were  each 


XXXVl  POSTSCRIPT 

Other's  important  customers.  The  exploitation  of  raw  materials 
was  not  nationalized.  Great  Britain  controlled  the  world's  supply 
of  oil-seeds  but  a  small  German  city,  Harburg,  was  the  center  of 
the  oil-seed  crushing  industry.  The  United  States  was  the  lead- 
ing source  of  cotton  and  of  copper,  but  England  and  Germany  were 
the  chief  makers  of  textile  and  electrical  goods  for  domestic  and 
foreign  markets.  Germany,  as  a  result  of  her  system  of  education, 
developed  those  industries  which  required  a  wide  diffusion  of  sci- 
entific knowledge,  and  which  held  the  key  to  the  economic  life  of 
the  nations,  such  as  the  manufacture  of  drugs,  dyes,  optical  goods 
and  electrical  machinery.  The  world  had  become  dependent  on 
Germany  for  many  of  its  "key  industry"  products. 

Before  the  Great  War,  the  world  had  become  unified,  inter- 
dependent, organic,  sensitive.  Therefore,  men  were  encouraged 
to  dream  of  universal  peace,  and  therefore,  also,  had  war  become 
so  costly,  both  in  money  and  in  sacrifice.  In  fact,  Achille  Loria, 
the  Italian  economist,  pointed  out  that  the  greater  cost  of  modern 
war  promises  to  widen  the  "zone  of  arbitration" ;  when  nations 
risk  in  war  more  than  they  are  likely  to  gain  as  a  result  of  it, 
peaceful  settlement  becomes  profitable. 

Then  came  the  great  catastrophe.  Economically,  it  revealed 
to  the  world  the  essential  dependence  of  each  people  upon  all 
others.  The  harmonious  functioning  of  modern  industrial  society 
was  possible  only  within  narrow  limits  and  under  conditions  of 
peace.  The  suffering  during  war  time  resulted  from  an  attempt 
at  self-sufficiency,  enforced  upon  the  nations,  belligerent  and 
neutral.  An  international-mindedness  has  grown  out  of  the  war. 
Not  only  the  London  merchant,  but  also  the  tin  miner  of  the 
Straits  Settlements,  the  coffee  laborer  of  the  Brazilian  plantations, 
the  toiler  in  the  Congo  rubber  fields,  and  the  Afghan  tribesman, 
had  been  economically  knit  to  overseas  communities  before  the 
war.  The  great  cataclysm  shook  them  profoundly,  and  left  them 
more  conscious  than  before  of  their  dependence  on  other  human 
beings  in  distant  lands.  The  war  in  Europe  incited  mobs  to  rice 
riots  in  Japan,  and  to  race  riots  in  our  own  East  St.  Louis.  It 
raised  the  cost  of  living  in  China  and  caused  strikes  in  Argentina. 
To  predicate  isolation  of  any  country,  even  of  the  United  States, 
is  an  exhibition  of  infantile  and  wishful  thinking, — the  desire 
to  escape  from  the  responsibilities  of  reality. 

The  belligerent  nations  sought  to  increase  their  supplies  for 


POSTSCRIPT  XXXVU 

war  purposes.  But  they  did  not  realize  adequately  the  nature  of 
the  industrial  readjustment  demanded  by  war,  the  need  for  the 
repression  of  luxury  consumption  and  of  non-essential  production, 
nor  did  they  frame  a  fiscal  policy  that  would  obtain  this  result. 
Excepting  Great  Britain,  which  relied  heavily  on  taxation,  the 
European  powers  financed  the  war  chiefly  by  means  of  loans  and 
paper  money,  put  the  burden  during  the  war  upon  the  weakest 
shoulders  in  the  community,  and  embarrassed  the  finances  of  the 
postwar  period.  The  war  has  made  the  masses  conscious  of  the 
vital  bearing  on  their  lives  of  their  government's  policies  in  finance, 
matters  generally  regarded  of  recondite  nature  and  remote  inter- 
est. The  vanishing  of  lifelong  savings,  stolen  by  the  state  through 
inflation  of  the  currency,  the  tantalizing  rise  in  the  cost  of  living 
of  the  poor,  and  the  under-nourishment  of  their  children  has  made 
the  public  appreciate  the  significance  of  public  finance  to  private 
welfare,  and  the  costliness  of  invisible  taxation.  The  pursuit  of 
seemingly  painless  policies  in  finance  are  now  ending  in  the  per- 
plexities if  not  the  despair  of  ministers  of  finance,  and  in  the  trials 
if  not  the  tragedies  of  millions  of  human  beings. 

The  postwar  difficulties  arise  from  the  effects  of  the  war,  and 
of  the  terms  of  the  peace.  The  financing  of  the  war  by  loans 
and  paper  money  resulted  in  huge  debts,  inflated  note  issues,  de- 
preciated currencies,  gold  embargoes  and  unstable  exchange  rates. 
These  largely  inevitable  postwar  conditions  repressed  production 
and  hampered  international  trade,  but  in  addition  the  terms  of 
peace  played  havoc  with  the  prewar  economic  organization  of 
Europe.  As  if  the  war  had  not  bequeathed  a  sufficient  heritage 
of  woe,  the  peace  conferees  bestowed  upon  Europe  new  difficulties 
of  their  own  creation.  Like  the  Bolshevists  who  think  that  the 
economic  life  of  a  nation  wnll  function  under  all  conditions,  just 
because  it  happened  to  function  under  certain  known  conditions, 
the  peace  makers  at  Paris  took  for  granted  that  Europe  would 
thrive  because  of  many  restrictions,  just  because  it  flourished  in 
spite  of  a  few  of  them  before  the  war. 

It  is  unnecessary  to  recite  in  detail  the  much  criticized  and 
now  well-known  errors  of  the  diplomats  at  Paris.  Map  making, 
rather  than  healing  of  the  economic  wounds  of  Europe,  was  their 
main  concern.  They  drew  boundary  lines  instead  of  reviving  in- 
dustries. The  British  statesmen  did  not  maintain  the  same  dis- 
passionate attitude  toward  Germany  in  1919  that  their  predecessors 


XXXVm  POSTSCRIPT 

did  toward  France  In  1815.  No  Allied  statesman  in  19 19  had  the 
vision  to  foresee  the  chaos  that  now  grips  a  disintegrated  Europe, 
and  none  had  the  courage  to  face  the  mob  spirit,  rife  after  the 
armistice.  The  European  diplomats  were  the  victims  of  the  propa- 
ganda which  they  had  engendered  and  supinely  they  fed  the  hate 
and  passion  which  they  had  aroused.  None  uttered  words,  such 
as  Castlereagh  wrote  to  Wellington  In  181 5.  "There  is  not  a 
power  that  borders  on  France,  from  the  Channel  to  the  Medi- 
terranean, that  is  not  pushing  some  acquisition  under  the  plea  of 
security  and  rectification  of  frontier.  They  are  foolish  enough  to 
suppose  that  the  Great  Powers  are  to  be  in  readiness  to  protect 
them  in  the  enjoyment  of  these  petty  spoils." 

Professing  the  ideal  of  self-determination,  but  practising  the 
ruse  de  guerre  of  debilitating  the  enemy  powers,  the  Allied  diplo- 
mats cut  up  Central  Europe.  The  existing  systems  of  transporta- 
tion were  rendered  ineffective  by  the  new  boundaries,  and  the 
newly  created  states  must  therefore  dissipate  their  energ>',  construct- 
ing new  railroads  for  a  new  Industrial  society,  establishing  new 
mints,  new  banks  of  Issue,  new  post  offices,  new  bureaucracies,  and 
new  overhead  charges  for  new  states.  New  tariffs  and  new  re- 
strictions on  trade  were  enacted.  The  economy  of  large  units  had 
been  applied  in  industry  during  the  war,  but  was  ignored  in  state- 
making  at  the  peace  table.  In  the  words  of  Brailsford's  "After 
the  Peace,"  "The  treaty  worked  against  life,  against  creation, 
against  production.  It  crushed  the  most  productive  people,  for- 
getting that  production  carried  to  the  utmost  level  attained  in 
Central  Europe  can  be  the  effort  only  of  generations  of  education, 
science  and  organization.  It  showered  its  favors  on  Poles,  Ru- 
manians and  Jugoslavs,  primitive,  unschooled  races,  not  indeed 
without  their  own  charm  and  emotional  genius,  who  never,  even 
after  generations  of  experience,  are  likely  to  replace  the  Germans 
as  industrial  or  intellectual  workers." 

To  cap  the  climax,  and  in  spite  of  the  dictates  of  prudence 
and  of  their  plighted  word  at  the  armistice  not  to  include  pensions 
and  allowances,  the  Allies  levied  an  indemnity  on  the  defeated 
powers,  which,  because  of  its  amount,  has  completed  the  task  of 
disorganizing  the  prewar  economic  system  of  Central  Europe.  In 
the  words  of  one  of  the  legal  counsel  of  the  American  peace  dele- 
gation, they  worked  on  the  theory  that  "a  hurricane  from  the  west 
might  repair  the  damage  wrought  by  a  hurricane  from  the  east." 


POSTSCRIPT  XXXIX 

Then,  like  Goethe's  Zauberlehrling,  who  conjured  up  the  spirits 
but  could  not  lay  them,  the  Supreme  Economic  Council,  in  its 
statement  of  March  8,  1920,  essayed  to  find  a  magic  formula  that 
might  undo  the  mischief  wrought  by  the  fatal  words  of  the  treaty. 
After  having  sown  the  seeds  of  another  war  in  Europe,  the 
Supreme  Economic  Council  exhorted  the  new  states  to  cease  fight- 
ing. After  pulverizing  the  Central  European  bloc,  the  Council 
urged  the  constituent  parts  to  form  a  new  economic  unit.  After 
letting  loose  the  nationalist  passions,  the  Council  vainly  pleaded 
to  restrain  their  expression. 

What  of  the  outlook?  Financially,  the  governments  of  Europe 
present  an  array  of  pathological  cases,  from  Russia,  Poland, 
Austria,  and  recently  Germany,  whose  currencies  are  almost  worth- 
less, on  the  one  hand,  to  Italy,  France,  and  Belgium  and  so  on 
up  to  England,  whose  exchange  rate  is  depreciated  relatively  least 
among  the  great  powers  of  Europe.  The  entire  gamut  of  financial 
disorders  is  here  presented.  The  currency  of  the  first  group  of 
countries  will  never  return  to  gold  parity,  that  of  England  most 
likely  will,  barring  unforeseen  contingencies.  Whether  the  paper 
money  of  the  members  of  the  intermediate  group  will  again  equal 
gold  parity  is  an  open  question.  If  they  deflate  their  currencies, 
the  burden  of  the  debt  charges  may  bankrupt  them.  There  were 
budget  deficits  in  three-quarters  of  the  countries  represented  at  the 
International  Financial  Conference  at  Brussels  in  1920  and  in 
eleven-twelfths  of  the  countries  of  Europe,  and  there  is  little  like- 
lihood of  an  improvement  in  the  near  future.  Twenty  per  cent 
on  the  average,  and  in  some  cases  much  more  of  the  budget  ex- 
penses of  the  powers  represented  at  the  Brussels  conference,  were 
devoted  to  armament  and  military  operations.  ]\Iilitarism  has  be- 
come a  luxury  that  present-day  Europe  cannot  afford.  From  the 
point  of  view  of  the  continued  existence  of  the  European  states, 
and  of  the  survival  of  their  inhabitants,  fighting  is  a  non-essential 
industry.  The  price  of  imperialism  has  exceeded  the  capacity  of 
the  peoples  to  pay  for  it. 

The  treaty  may  be  unjust  in  its  principles,  and  unsound  in  its 
prescriptions,  yet  the  solution  of  the  difficulties  in  Europe  lies  not 
in  another  military  conflict.  Civilization  dare  not  soon  again  be 
fluxed  in  the  crucible  of  war.  The  slower  processes  of  interna- 
tional adjustment  by  negotiation  seem  the  alternative  means  to 
attain  stability  in  Europe.    Time  is  the  ally  of  truth.    A  growing 


Xl  POSTSCRIPT 

international  public  opinion  will  not  long  brook  injustice,  be  it 
in  Korea  or  Colombia,  in  Shantung  or  Silesia.  And  to  this  delib- 
erative process  of  modifying  the  recent  treaties,  and  of  readjusting 
international  relations,  America  can  not  be  indifferent. 

America  is  deeply  concerned  in  the  remedies  to  be  applied.  She 
is  tied  to  Europe  by  innumerable  bonds,  political  nerves,  and 
economic  arteries,  and  the  paralysis  of  the  peoples  in  Europe  is 
reflected  in  the  unhealthy  condition  of  the  United  States.  The 
symptoms  of  disorder  in  our  own  country  are  traceable  to  the 
focus  of  infection  in  Europe.  That  the  world  is  a  living,  organic 
unit  is  painfully  brought  home  to  the  nation  which,  according  to 
some  of  its  spokesmen,  pretended  to  live  in  isolation. 

In  some  of  the  steps  to  be  taken  to  insure  the  recovery  of  the 
nations  of  Europe,  foreign  influences  avail  little.  These  nations 
must,  themselves  alone,  grapple  with  many  problems:  deflation, 
balancing  of  the  budget,  stabilization  of  note  issues  and  of  the 
purchasing  power  of  paper  monies;  ultimately  perhaps  a  revalua- 
tion of  the  currency  and  the  free  movement  of  gold ;  the  funding 
of  floating  debts ;  the  conversion  of  existing  debts  into  issues  bear- 
ing a  lower  rate  of  interest;  in  some  countries  a  capital  levy;  in 
others  a  forced  loan,  and  perhaps  in  a  few,  bankruptcy  and  a  clean 
slate — these  financial  travails  must  be  borne  by  each  nation  for 
itself. 

Only  in  measures  of  international  concern  can  America  lend 
any  aid.  She  can  encourage  international  loans  by  joining,  in  the 
definition  of  her  own  claims  against  the  Allies,  and  in  the  de- 
termination of  questions  of  security  and  priority  of  new  private 
loans.  She  can  put  the  credit  facilities  of  New  York  at  the  dis- 
posal of  borrowers  whom  London  alone  can  no  longer  accommo- 
date. She  can  advocate  the  further  moderation  of  the  terms  of 
the  treaty,  a  policy  hitherto  pressed  chiefly  by  Great  Britain  alone. 
America  can  exert  her  influence  to  eliminate  trade  restrictions,  and 
to  strengthen  those  forces  making  for  economic  unity  and  the 
harmonious  functioning  of  the  nations  of  Europe.  But  no  ipse 
dixit  of  any  single  power  will  produce  an  adequate  result.  Alone, 
America  may  preach  and  pray,  but  she  can  neither  direct  nor 
govern  in  international  affairs.  Her  vast  interests  within  her  own 
boundaries  and  her  relatively  sparse  population  have  prevented 
the  development  of  a  decisive  interest  and  effective  public  opinion 
in   international  problems,  or  of   a  personnel  trained   in   foreign 


POSTSCRIPT  xli 

affairs.  The  assets  of  America  in  the  council  of  the  nations  are 
an  economic  disinterestedness  and  the  capacity  for  a  moral  enthu- 
siasm, such  as  its  people  evinced  during  the  war.  Unexpressed, 
her  disinterestedness  must  degenerate  into  indifference,  and  her 
generous  cooperation  in  wartime  cool  to  cynical  apathy.  Within 
an  organization  of  the  nations,  her  attributes  may  be  effective  in 
the  redemption  of  Europe.  Without  membership  in  an  interna- 
tional body,  America's  efforts  have  been  halting  and  half-hearted, 
and  her  potentialities  for  service  to  the  world  and  not  less  to 
herself  may  eventually  wane. 

In  the  reorganization  of  international  finance,  America  can 
function  more  worthily  and  effectively  in  conjunction  with  the 
other  powers,  both  those  in  distress  and  those  capable  of  aiding. 
The  promotion  by  the  United  States  of  closer  international  bonds 
does  not  imply  the  assumption  of  other  nations'  burdens.  The 
exercise  of  the  influence  of  the  United  States  in  international 
affairs  does  not  involve  a  guaranty  to  foreign  countries  against 
the  losses  resulting  from  unsound  fiscal  policies,  or  a  willingness 
to  underwrite  the  inept  war  financing  of  certain  of  the  European 
powers,  or  a  readiness  to  make  good  out  of  its  resources  the  in- 
dustrial losses  to  Europe  resulting  from  unworkable  reparations 
terms. 

This  generation  of  Americans  has  a  plain  obligation  to  the 
world,  and  to  itself.  History  will  judge  our  heads  and  our  hearts, 
our  sagacity  and  our  altruism  by  our  present  foreign  policy. 


INTERNATIONAL  FINANCE 
AND  ITS  REORGANIZATION 


International  Finance 
and  its  Reorganization 


SECTION  A 
THE  EFFECTS  OF  THE  WAR 


INTERNATIONAL   FINANCE  AND 
ITS  REORGANIZATION 

Part  One 
PUBLIC  DEBT  AND  TAXATION 

CHAPTER  I 
PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR^ 

A.  The  Theory  of  War  Finance 

A  mediaeval  method  of  financing  war  was  b}^  means  of  a  fund 
accumulated  as  a  measure  of  preparation.  A  militaristic  method 
of  financing  war  was  the  seizure  of  booty,  levying  upon  the  invaded 
territory,  and  the  imposition  of  indemnities.  In  modern  times 
nations  have  financed  military  operations  by  means  of  paper  money. 
More  recently  the  chief  reliance  has  been  upon  loans.  The  demo- 
cratic way  of  financing  a  war  is  to  impose  heavy  taxes  and  to  raise 
the  balance  of  necessary  revenue  by  loans. 

In  times  of  peace  the  social  surplus  is  the  difference  between 
the  goods  consumed  in  maintaining  life  and  the  goods  produced  in 
industry.  Theoretically,  the  entire  social  surplus  may  be  appro- 
priated temporarily  for  the  public  need  by  taxation.  The  objective 
costs  of  war  are  goods  and  services,  devoted  to  the  conduct  of  mili- 

^  Patten,  Simon  N.,  Mandeville  in  the  Twentieth  Century.  American 
Economic  Review,  March,  1918. 

Kemmerer,  E.  W.,  Inflation.     American  Economic  Review,  June,  1918. 

Seligman,  E.  R.  A.,  Who  is  the  Twentieth  Century  Mandeville,  Ibid. 

Plehn,  Carl  C,  Substance  and  Shadow  in  War  Finance,  Idem.,  Sept., 
1918. 

Davenport,  H.  J.,  The  War  Tax  Paradox,  Idem.,  March,  1919. 

Papers  by  Adams,  T.  S. ;  Hollander,  Jacob  H. ;  Patten,  Simon  N. ; 
Seligrnan,  E.  R.  A.;  Sprague,  O.  M.  W. ;  and  others.  The  Annals  of  the 
American  Academy  of  Political  and  Social  Science,  January,   1918. 

Sprague,  O.  M»  W.,  The  Conscription  of  Income.  Economic  Journal, 
March,  1917. 


2  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

tary  operations.  The  subjective  costs  of  war  are  burdens  and 
sacrifices  made  by  the  community  in  effecting  a  transition  from 
peace  to  war.  The  burden  of  war  falls  on  the  fighting  generation, 
for  it  must  reduce  its  consumption  by  an  amount  equal  to  the  in- 
creased military  consumption  and  the  capital  invested  in  war 
plants  and  facilities.  The  demand  of  the  fighting  generation  on 
the  current  national  income  must  be  reduced  by  deferring  satis- 
factions or  by  lowering  the  standard  of  living. 

The  contribution  of  goods  for  the  conduct  of  war  must  come 
out  of  current  production.  The  past  can  contribute  but  little,  for 
fixed  assets  and  capital  goods  cannot  be  consumed,  except  to  a 
slight  extent.  But  the  future  contributes  nothing  at  all,  for  goods 
to  be  produced  after  the  war  cannot  be  used  during  the  war. 
Furthermore,  a  fighting  nation  may  increase  its  consumption,  if 
another  nation  is  willing  to  lend  its  current  surplus  of  production. 
The  goods  are  provided  during  the  war.  "The  future  does  not 
provide  for  the  war;  future  producers  merely  indemnify  present 
providers.  The  lending  nation  or  persons  who  bear  the  burden 
during  the  war  may  be  indemnified  later  at  the  cost  of  other 
people." 

The  real  cost  of  the  war  can  be  met  only  by  a  reduction  in 
consumption.  A  country  with  an  annual  surplus  of  $1,000,000,000 
cannot  spend  $5,000,000,000,  unless  it  borrows  abroad  or  inflates 
its  currency.  No  nation  can  spend  more  than  it  can  produce  and 
borrow.  And  the  advocates  of  light  taxation  and  large  loans 
stultify  themselves,  when  they  point  out  the  discrepancy  between 
the  amounts  to  be  raised  by  loans  and  the  amounts  available  from 
taxation.  Curtailment  of  consumption  may  be  effected  in  three 
ways.     Taxation  involves  a  compulsory  decrease  in  consumption. 

Withers,  Hartley,  Our  Money  and  the  State,  p.  29. 

Pigou,  A.  C,  The  Economy  and  Finance  of  the  War,  1916,  p.  70. 

Joint  Conference  of  the  Western  Economic  Society  and  the  City  Club 
of  Chicago,  June  21,  22,  1917.     Financial  Mobilization  for  War. 

Proceedings  of  the  Twenty-ninth  Annual  Meeting  of  the  AmericaD 
Economic  Association,  December,  1916. 

Scott,  W.  R,  The  Adjustment  of  War  Expenditure  between  Taxes 
and  Loans.    Glasgow,  1917. 

Edgeworth,  F.  Y,,  Currency  and  Finance  in  Time  of  War.  Oxford, 
1917. 

Arbuthnot,  C.  C,  Paying  the  Cost  of  the  War.  The  Scientific  Monthly, 
vol.  vii:  413-434, 

Laughlin,  J.  Laurence,  Credit  of  the  Nations,  Scribners,  1919,  Chap, 
II,  War  and  Credit. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  3 

Appeals  to  buy  bonds  lead  to  voluntary  curtailment  of  consumption. 
And  finally,  inflating  the  currency  reduces  purchasing  power  and 
by  stealth  deprives  the  masses  of  the  ability  to  buy.  Taxation 
means  relatively  low  net  money  wages  and  relatively  stable  prices. 
Inflation  means  an  Increase  of  money  wages  but  a  decrease  In  real 
wages  because  of  a  relatively  greater  rise  In  commodity  prices.  In 
any  event,  the  consumption  of  the  masses  is  restricted,  so  that  the 
non-producers  and  fighters  may  be  maintained.  To  Increase  the 
margin  betvi^een  consumption  and  production  there  must  be  either 
a  lower  money  Income  per  capita  or  less  purchasing  power  In  the 
unit  of  money. 

i.  Goods  versus  Credit 

An  adequate  comprehension  of  war  financing  requires  that 
symbols  and  tokens  of  value,  such  as  money,  currency,  and  credit 
be  left  out  of  consideration  and  that  the  underlying  production, 
consumption,  and  surplus  of  economic  goods  be  studied. 

In  times  of  peace  the  consumption  of  goods  Is  limited  by  produc- 
tion and  distribution.  There  Is  always  the  underfed  group  at  the 
margin  of  society.  In  times  of  war  the  production  and  distribution 
of  goods  are  conditioned  by  war  requirements  or  consumption. 
Plants  are  built  to  meet  needs.^ 

The  Increased  consumption  of  goods  In  time  of  war  Is  not  so 
great  as  it  seems,  for  the  increase  In  public  consumption  is  balanced 
by  the  restriction  of  private  consumption.  A  mobilized  army  con- 
sumes to  a  large  extent  much  the  same  quantity  of  food  and  clothing 
as  its  members  consume  in  times  of  peace,  and  the  increased  con- 
sumption of  strictly  military  goods  is  made  possible  by  the  restriction 
on  the  production  of  goods  not  essential  to  the  conduct  of  the 
war. 

The  emphasis  on  the  concept  of  goods  rather  than  of  money 
helps  to  clarify  thinking.  The  need  for  the  economic  readjustment 
Incident  to  the  beginning  and  the  ending  of  a  war  becomes  evident. 
Furthermore,  it  becomes  dear  that  the  generation  that  conducts 
the  war  must  pay  the  whole  cost  of  the  war,  and  that  the  burden 
cannot  be  shifted  to  the  next  generation." 

-Adams,  H.  C,  Public  Debts.  D.  Appleton  &  Co.,  1887.  Chapter  on 
Financial  Management  of  the  War.     Pp,  105-142. 

'Report  of  Committee  on  the  Purchasing  Power  of  Money.  American 
Economic  Review,  vol.  IX,  No.  i,  supplement,  p.  365. 


4  INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

"For  each  generation  must  subsist  upon  the  products  of  its  own 
industry.  No  father  can  eat  the  potatoes  to  be  hoed  by  an  unborn 
son,  nor  can  an  army  live  on  bread  to  be  delivered  between  ten 
and  forty  years  from  the  date  of  the  contract."  * 

Furthermore,  this  distinction  between  goods  and  credit  makes 
it  possible  to  distinguish  between  the  actual  war  losses  and  the 
so-called  war  costs.  The  war  losses  are  in  goods  and  the  war 
costs  are  expressed  in  terms  of  money.  Losses  include  goods  that 
were  destroyed.  Costs  include  (i)  a  national  debt  which  has 
become  the  private  assets  of  the  nation's  citizens,  (2)  paper 
currency,  which  was  issued  to  buy  goods,  and  (3)  taxes,  which 
represent  a  part  of  the  private  surplus  surrendered  to  make  possible 
an  increase  of  public  consumption.^ 

It  is  evident  then  that  goods  are  primary  and  that  credit  and 
money,  which  are  merely  measures  of  goods,  are  secondary. 
Although  goods  are  consumed  or  destroyed,  the  money  paid  for 
them  remains.  It  is  not  liquidated.  The  lender  furnishes  present 
goods  and  the  borrower  promises  to  repay  future  goods.  The 
wastes  of  war  consist  of  the  destruction  of  surplus  goods.  To  make 
the  surplus  as  large  as  possible,  consumption  of  non-essential  goods 
is  curtailed  so  that  the  production  of  essential  goods  may  be 
increased.  But  at  bottom  the  waste  resulting  from  war  is  the 
same  as  the  waste  resulting  from  extravagance  in  times  of  peace. 
Both  are  alike  in  that  they  result  in  the  depletion  of  the  economic 
surplus.  The  failure  to  satisfy  the  demand  for  luxuries  is  a  phase 
of  the  diverting  and  deferring  of  human  satisfactions  in  order  to 
promote  the  war  aims  or  to  meet  the  pressing  social  need. 

Credit,  however,  depends  upon  goods.  The  ability  to  borrow 
depends  on  the  productive  power  of  a  nation,  present  or  prospective. 
Banknotes  and  paper  money  do  not  increase  a  nation's  wealth. 
Furthermore,  great  debts  do  not  end  a  war.  As  the  surplus  of 
production  over  consumption  is  reduced,  a  nation  is  weakened. 
When  the  surplus  above  the  necessities  is  wiped  out,  the  war  must 
cease.  National  exhaustion  is  reached  not  when  the  debt  reaches 
a  certain  limit  (as  Karl  Helfferich  thought  would  be  the  case  when 
Germany's  debt  reached  mk.  100,000,000,000),  but  when  the  mar- 
gin of  production  over  consumption  becomes  a  minus  quantity.  This 

*  Adams,  H.  C,  Ibid. 

^  Jaffe,  Edgar,  Kriegskosten  und  Volksvermoegen.  Europaeische  Staats- 
und-Wirtschafts  Zeitung,  December  15,  1917. 


PRINCIPLES   AND  PRACTICE   IN  THE   WORLD  WAR  $ 

margin  Is  fixed  not  alone  by  the  Increase  In  production  of  essential 
goods,  but  by  decrease  In  the  consumption.  This  second  factor 
particularly  Is  elastic.  In  191 5  the  Germans  raised  the  cry  that 
the  nation  was  being  starved,  and  yet  for  three  years  longer  they 
conducted  a  war  which  exhausted  their  European  opponents  and 
which  was  finally  decided  only  when  the  latter  obtained  uncon- 
ditional access  to  the  supply  of  goods  made  available  In  the  United 
States.  This  restriction  of  consumption  of  goods  In  Germany 
Helfferich  termed  "the  moral  reserves"  of  the  German  people. 

il.  Inflation 

(a)  Causes  of  Inflation — 

In  normal  times  the  banking  practice  of  most  countries  Imposed 
a  limit  on  the  volume  of  notes  and  deposits  with  respect  to  the 
gold  reserve  of  the  state  bank.  As  a  result  of  war,  this  limit  was 
suspended.  The  banks  lend  to  the  government,  which  receives  a 
deposit  credit,  and  against  it  payments  are  made  to  the  war  Indus- 
tries, whose  deposits  In  turn  are  increased.  The  Inflation  finally 
filters  throughout  the  community.  In  time  of  war  the  govern- 
ment has  enormous  purchasing  power.  It  needs  goods  and  bids 
up  prices.  There  Is  little  difference  whether  the  increased  pur- 
chasing power  of  the  government  takes  the  form  of  deposit  credit 
or  paper  money.  To  the  extent  that  loans  come  not  from  savings 
of  the  Investor,  but  from  his  borrowings  at  the  banks  or  from  sub- 
scription by  banks,  inflation  is  caused.  The  Increase  In  deposits 
causes  an  Increased  demand  for  small  currency  and  paper  money 
to  transact  business.  This  currency  Is  usually  inconvertible  so 
that  while  there  is  no  danger  of  a  run  on  a  bank,  there  is  also 
absent  the  wholesome  check  upon  the  excessive  Issue  of  paper.  In 
brief,  the  rise  of  prices  during  a  war  is  caused  by  the  large  and 
pressing  demands  of  the  government  and  an  increased  supply  of 
credit  or  currency. 

(b)  The  Nature  of  Inflation — 

Inflation  results  from  a  lowering  of  the  ratio  of  the  volume 
of  goods  to  the  volume  of  money.  If  the  volume  of  money  In 
circulation  increases  more  rapidly  than  the  volume  of  goods  pro- 
duced, prices  will  rise.  This  Is  an  historic  process.  Professor 
Thorold   Rogers   in   his   "History  of   Agriculture   and   Prices  in 


6  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

England"  shows  that  in  the  thirteenth  century  an  ox  was  wortH 
about  IDS.,  a  sheep  is.  6d.,  and  a  quarter  of  wheat  5s.  6d.,  and 
the  wage  of  a  laborer  was  about  5d.  to  6d.  per  day.  About  the 
year  1500,  an  ox  cost  22s.  6d.,  a  sheep  2s.  46.,  a  quarter  of  wheat 
5s.  6d.,  and  the  wage  of  a  laborer  about  5d.  to  6d.  per  day. 
Average  decennial  prices  of  oxen  from  the  thirteenth  to  the 
seventeenth  century  are  given  herewith:^ 


Period 

Average  price  of  oxen 

s.  d. 

1261-1270 

10    3 

1331-1340 

12     9I 

1391-1400 
1461-1470 

14    9I 
20     7i 

1521-1530 
1571-1580 
1633-1642 
1693-1702 

30  10? 

85  loh 
189    8 
166     8 

When  the  increase'  in  the  volume  of  gold  or  of  credit  or  in  the 
circulation  of  monej'  outruns  the  increase  in  production  of  goods, 
prices  rise. 


(c)    The  Results  and  Evils  of  Inflation — 

Inflation  results  in  a  rise  in  prices  or  a  decline  in  real  wages. 
As  a  result  of  competition  between  employers,  money  wages  tend  to 
rise  after  prices,  but  they  lag  behind.  The  lag  of  wages  and  of 
other  costs  of  production  behind  prices  makes  profiteering  possible. 
When  profits  are  made  at  the  expense  of  wages  it  means  that  the 
laborer  bears  the  brunt  of  the  war  and  the  profiteer  fixes  his  gains 
by  investing  them  in  war  loans.  The  laborer's  invisible  contribu- 
tion to  the  war  consists  in  the  amount  by  which  wages  lag  behind 
prices.  The  burden  of  the  war,  therefore,  falls  upon  a  class  least 
able  to  bear  it.  Income  is  shifted  from  the  thrifty  wage  earner  to 
the  spendthrift  profiteer.  Inflation  Is  an  unrecognized  form  of 
taxation,  which  falls  upon  those  with  fixed  Incomes  from  labor  or 
investments.  Inflation  constitutes  an  Income  tax  on  the  salaried 
class  and  a  capital  tax  on  the  bond  owner. 

*  Rogers,  J.  E.,  Thorold,  History  of  Agriculture  and  Prices  in  England, 
Clarendon  Press,  1866-1902,  vol.  I,  p.  361,  vol.  IV',  p.  355,  vol.  V,  p.  354. 


PRINCIPLES    AND   PRACTICE   IN   THE   WORLD   WAR  ^ 

Another  evil  of  inflation  consists  in  the  fact  that  the  govern- 
ment receives  money  tjf  a  low  purchasing  power  during  the  war 
and  later  retires  its  bonds  with  money  of  a  high  purchasing  power, 
although  as  an  offset  the  government  is  usually  able  to  refund  at 
a  lower  rate  of  interest.  Since  the  postwar  taxes  do  not  fall  on 
the  holders  of  government  bonds  pro  rata,  the  war  profiteers  are 
favored.  Again,  the  increase  m  deposits  and  in  banking  trans- 
actions creates  a  false  optimism,  which  operates  against  economy 
in  the  use  of  funds.  Finally,  inflation  frequently  results  in  a 
departure  from  the  gold  standard,  a  dislocation  of  international 
trade,  depreciation  of  the  exchanges  abroad  and  a  discount  on  paper 
money  at  home,  and  a  difficulty  in  contracting  foreign  loans. 

However,  inflation  does  play  a  useful  part  in  several  ways. 
Primarily,  it  results  in  a  rise  of  prices  which  stimulates  industry. 
Financially  it  has  the  value  of  a  bundle  of  hay  tied  in  front  of  a 
donkey's  nose.  The  tremendous  increase  in  production  in  the 
belligerent  countries  during  the  war  was  partly  the  result  of  war- 
time inflation.  On  the  other  hand  this  benefit  is  limited  to  the 
early  stages  of  the  war,  until  the  maximum  of  productive  capacity 
is  developed.  Inflation  is  indiscriminate  in  it  effects,  and  the  non- 
essential industries  as  well  as  the  war  industries  are  stimulated. 
Finally,  inflation  compels  economy  and  a  reduction  in  the  con- 
sumption of  luxuries,  thus  releasing  labor  and  capital  for  the  pro- 
duction of  essential  goods.  However,  this  end  may  be  attained 
more  directly  by  taxation,  by  rationing  raw  material,  or  by  establish- 
ing priority  in  shipment  or  in  financing. 

iii.   The  Burden  of  the  Present  or  the  Future  Generation 

Though  it  is  true  that  the  war-waging  generation  must  provide 
the  goods,  the  burden  falls  upon  the  individuals  of  future  genera- 
tions to  the  extent  that  the  taxpaying  and  the  bondholding  groups 
are  not  identical  and  that  the  expense  of  collection  of  taxes  bears 
on  these  later  generations.  While  the  country  as  a  whole  is  neither 
richer  nor  poorer,  after  it  has  returned  as  bond  interest  the  taxes 
which  it  has  collected  for  this  purpose,  there  is  a  transfer  of  wealth 
from  one  group  in  the  community  to  another  because  the  proportion 
of  taxes  paid  by  the  various  classes  of  income-taxpayers  does  not 
correspond  with  the  proportion  of  war-loan  interest  received  by 
them.     The  individual  who  was  enriched  as  a  result  of  the  war 


8  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

and  who  may  have  bought  war  loans  is  benefited  in  the  after-war 
period.  On  the  other  hand,  the  individual  or  corporation  which 
is  developing  a  profitable  business  in  the  after-war  period  bears 
the  burden.  Taxes  to  pay  interest  on  war  loans  hamper  produc- 
tion and  repress  industry  after  the  war.  In  other  words,  the 
greater  the  reliance  upon  loans  for  financing  a  war,  the  greater  the 
likelihood  of  shifting  wealth  among  the  individuals  of  later  genera- 
tions, often  unjustly  and  often  to  the  detriment  of  the  industrial 
development  of  the  country. 

To  the  extent  that  the  war  is  financed  by  taxes,  the  burden  is 
borne  by  the  generation  that  fights.  The  accounts  of  future  gen- 
erations remain  unaffected  except  to  the  extent  that  over\vork  or 
undernourishment  may  impair  the  post-war  productivity  of  the  war- 
waging  generation  and  the  vitality  of  succeeding  generations.  The 
financing  of  war  by  loans  tends  to  fix  the  riches  of  the  class  that 
profited  most  through  the  war,  and  to  transfer  the  tax  burden  to 
the  less  fortunate  individuals  of  succeeding  generations.  On  the 
other  hand,  the  financing  of  war  through  taxation  confines  the 
burden  to  the  war-waging  generation.  Again,  severe  taxes  during 
war  are  temporary  in  their  nature  and  do  not  repress  production 
as  much  as  prolonged  heavy  taxation  in  the  after-war  period.  In 
brief,  financing  a  war  by  taxation  leaves  less  of  a  burden  upon  the 
individuals  of  later  generations  than  does  financing  by  loans/ 

iv.   Taxes  vs.  Loans 

In  considering  the  alternative  of  taxes  or  loans,  there  are  other 
aspects  than  the  burden  on  the  individuals  of  the  war-waging  or 
subsequent  generations.  The  question  as  to  whether  a  war  should 
be  financed  entirely  by  loans,  entirely  by  taxes,  or  by  a  combination 
of  both  of  these  methods  has  been  repeatedly  discussed  by  economists 
and  treasury  officials  in  recent  times. 

Taxes  involve  compulsory  saving,  but  loans  voluntary  saving. 
A  forced  loan  also  compels  saving,  but  is  less  likely  to  lead  to 
evasion  than  taxes.  "Taxes  and  bonds,  so  far  as  they  are  paid 
by  income  receivers  out  of  income  receipts,  are  merely  difiFerent 
ways  of  getting  the  paying  done,  so  that  war  activities  and  war 
consumption   may  displace  civil   activities  and  civil  consumption, 

^Pigou,  A.  C,  The  Burden  of  War  on  Future  Generations,  Quarterly 
Journal  of  Economics,  Feb.,  1919,  vol.  33,  pp.  242-255. 


PRINCIPLES    AND   PRACTICE   IN   THE   WORLD   WAR  9 

and  not  at  all  a  way  of  deciding  whether  the  paying  shall  be  done 
now.  With  taxes,  the  contributions  are  collected,  the  tale  is  told, 
the  books  closed.  The  loan  method  provides  that  tax  payments 
shall  be  postponed,  not  that  payment  be  postponed ;  that  future 
taxpayers  shall  indemnify  the  lenders  for  their  present  advances; 
not  that  the  future  shall  provide  the  ships,  the  coal,  the  shells, 
the  clothing,  the  cannon,  the  food,  but  that  the  present  furnishers 
shall  in  the  future  be  reimbursed  through  taxes  for  what  they  have 
now  advanced.  The  taxpayer  of  the  future  time  will  merely  return 
to  the  present  contributors  (with  the  addition  of  interest,  it  is 
true)  what  present  taxation  would  have  compelled  them  to  pay 
now.  Taxes  are  merely  postponed  and  somewhat  increased.  But 
the  present  does  not  get  rid  of  the  burden.  The  present  taxpayer 
gets  rid  of  it  now,  only  in  the  sense  that  the  present  bond  buyer 
temporarily  assumes  it.  The  bond  method  means  merely  present 
sacrifices  out  of  present  incomes  in  support  of  the  present  war  on 
terms  of  a  promised  later  indemnity  out  of  taxes  later  to  be  collected. 
The  tax  method  means  contributions  without  a  promised  indem- 
nity. 


"  8 


(a)   Loans — 

It  may  appear  that  the  alternative  of  loans  or  taxes  really  does 
not  exist;  that  all  funds  ultimately  come  from  revenue  and  that 
therefore  the  liquidation  of  loans  involves  taxation  ultimately.  But 
the  fact  is  that  the  severity  of  taxation  during  a  war  is  a  determin- 
ing element,  for  the  liquidation  of  war  loans  may  be  brought  about 
by  much  lighter  taxation  spread  over  a  period  of  years.  Further- 
more, it  has  been  held  that  production  during  a  war  should  not 
be  repressed  by  heavy  taxation.  Again,  since  war  is  an  extra- 
ordinary expenditure,  it  is  held  to  be  unwise  to  attempt  to  make 
the  ordinary  revenue  cover  it.  Finally,  no  scheme  of  taxation  can 
be  just  to  all  the  members  of  a  community.  A  mild  levy  may  be 
inequitable  but  tolerable;  a  very  heavy  tax  may  not  only  work 
an  intolerable  injustice,  but  it  may  even  prevent  its  own  operation. 
On  the  other  hand,  loans  undoubtedly  lead  to  Inflation.  For  to 
the  extent  that  there  is  a  liquid  surplus,  it  may  be  taken  by  taxes; 
therefore  loans  must  be  raised,  In  large  part  at  least,  by  borrowing 
at  the  banks,  and  thus  they  inevitably  lead  to  inflation. 

"  Davenport,  H.  J.,  ibid. 


lO  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

I.  The  ARGUMENT  FOR  BONDS — Because  loans  lead  to  inflation 
and  raise  prices,  production  is  increased  during  the  war  and  there- 
fore there  is  a  larger  surplus  of  production  over  consumption  avail- 
able for  the  emergency.  Taxes  have  no  such  effect.  Furthermore, 
loans  at  the  beginning  of  a  war  are  necessary  in  order  to  give  the 
tax  payer  time  to  adjust  himself  to  new  burdens  and  to  give  the 
war  plants  ample  funds  for  prompt  expansion. 

No  one  now  advocates  the  financing  of  a  war  entirely  by  loans. 
The  use  of  credit  in  part  is  defensible,  if  post-war  taxation  to  pay 
interest  and  principal  does  not  throw  the  burden  upon  the  poor, 
those  that  could  not  buy  war  bonds. 

There  have  been,  however,  faulty  arguments  in  favor  of  the 
use  of  war  loans.  Some  economists  hold  that  regularly  recurrent 
expenses  should  be  met  out  of  taxation,  but  that  emergency  or  war 
needs  may  properly  be  met  out  of  loans,  provided  they  are  repaid 
before  another  similar  emergency  is  likely  to  arise.  The  fallacy 
of  this  argument  consists  in  the  fact  that  borrowings  by  a  corpora- 
tion or  by  an  individual  are  different  from  the  borrowing  by  an 
entire  community  of  itself.  The  borrowing  individual  or  corpora- 
tion obtains  the  accumulated  surplus  of  others.  The  same  is  true 
in  the  case  of  an  external  loan  to  a  nation.  But  the  state  borrow- 
ing internally  must  rely  upon  the  increase  of  its  surplus  of  produc- 
tion over  consumption. 

Another  faulty  argument  in  favor  of  loans  is  that  they  do  not 
cause  greater  inflation  than  taxes.  The  theory  is  that  inflation  is 
caused  by  the  increased  demands  of  the  government,  the  dislocation 
of  production  and  the  increase  in  private  credit  and  in  the  currency. 
However,  this  conclusion  takes  no  account  of  the  fact  that  the 
increased  supply  of  currency  is  in  part  the  result  of  the  loan  policy. 
The  Bank  of  France  issued  notes  against  government  securities. 
The  Bank  of  England  increased  its  "public  deposits"  and  ultimately 
"other  deposits"  against  government  advances.  In  the  United 
States  and  in  the  other  belligerent  countries,  the  holders  of  war 
paper  were  given  preference  in  making  loans  at  the  banks,  and 
thereby  deposits,  merely  another  form  of  money,  were  increased. 
For  a  government  bond  is  good  collateral  at  the  bank,  but  a  tax 
receipt  is  not.  While  it  is  true  that  taxpayers  have  to  borrow  at 
the  bank  to  meet  their  assessments,  yet  such  borrowings  are  neces- 
sarily both  brief  and  self-liquidating,  but  borrowings  on  war  paper 
are  neither.     Furthermore,  if  tax  installments  were  broken  up  into 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD  WAR  II 

smaller  fractions,  the  need  for  borrowing  could  be  obviated.  Great 
Britain,  for  example,  permitted  the  artisan  to  pay  his  taxes  in 
weekly  installments. 

2.  The  argument  against  bonds — ^The  chief  argument 
against  bonds  as  a  means  of  financing  a  war  is  the  growth  of  infla- 
tion. If  the  public  bought  the  entire  loan  inflation  would  not 
follow,  but  it  is  because  the  banks  must  carry  a  large  part  of  the 
bonds  for  the  subscribers  and  for  themselves  that  the  disadvantages 
of  the  loan  method  come  about.  Loans  lead  to  an  increase  in 
government  expenditure  without  correspondingly  curtailing  private 
expenditure,  as  taxes  do.  Prices  must  therefore  rise.  Whereas 
taxes  may  cause  some  inflation,  it  is  incomparable  in  extent  to  the 
inflation  caused  by  the  loan  policy.  "Bonding  induces  people  to 
think  they  can  grow  rich  on  the  unproductive  expenditures  of  the 
state.  Consumption  is  expanded  when  it  should  be  contracted,  A 
shortage  of  goods  follows  and  then  come  high  prices,  which  make 
people  believe  they  are  more  prosperous  instead  of  less  so.  Taxation 
if  wisely  laid  would  bring  order  out  of  chaos  and  not  only  exempt 
future  generations  from  the  burdens  of  war  but  also  lighten  those 
of  the  present.  In  essence,  the  burden  of  the  war  is  the  excess  of 
national  expenditures  over  national  surplus.  To  this  amount  the 
consumption  of  the  people  must  be  reduced.  If  expenditures  are 
seven  billion  dollars,  consumption  should  be  reduced  by  this  amount 
and  the  saving  turned  over  to  the  government.  The  account  is 
thus  squared  in  each  year  and  the  war  is  paid  for  but  once.  .  .  . 
Advocates  of  the  loan  policy  think  it  suicidal  to  take  seven  billions 
directly  and  yet  the  policy  adopted  takes  double  the  amount  from 
the  people's  pockets.  .  .  .  This  shows  that  the  people  are  paying 
two  dollars  in  increased  prices  for  every  dollar  the  government 
benefits  by  loans.  The  high  prices  make  profits  and  the  govern- 
ment borrows  the  net  gains  of  the  profiteer  to  carry  on  the  war. 
Forced  saving  by  this  process  turns  over  a  part  of  the  people's 
daily  consumption  to  the  recipients  of  high  prices.  What  the  people 
save  is  thus  given  to  a  privileged  class  and  they  loan  it  to  the 
government.  .  .  .  This  is  the  essence  of  carrying  on  the  war  by 
means  of  loans.  The  people  pay  for  the  war  by  their  reduced  con- 
sumption, the  benefit  of  which  goes  to  the  profiteer.  .  .  .  War 
loans  are  war  profits.  .  .  .  If  the  high  prices  were  occasioned  by 
an  increase  of  paper  money,  the  advocates  of  it  would  have  to 


12  INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

blush  for  their  logic,  but  when  the  same  inflation  is  produced  by  a 
bond  issue  a  quibble  is  possible  which  permits  a  flood  of  new 
argumentation  over  a  point  long  ago  settled. 

"The  people  suffer  from  inflation  and  thus  pay  for  the  war; 
they  will  suffer  and  pay  again  when  the  bonds  are  redeemed.  And 
there  will  come  the  greatest  suffering  of  all  in  the  financial  crises 
which  bring  inflated  values  back  to  a  normal  basis.  Three  pay- 
ments and  perhaps  more  are  what  this  financial  method  imposes. 
.  .  .  We  spend  money  but  instead  of  recognizing  it  we  cover  it 
up  by  calling  our  liabilities  assets.  To  tax  the  nation  ten  billions 
does  not  differ  in  its  ultimate  effects  on  wealth  from  a  bond  issue 
to  a  like  amount.  In  either  case  we  are  ten  billions  poorer.  In 
one  case  we  see  it  and  adjust  our  expenses  accordingly,  in  the 
other  we  rush  on  into  new  extravagances.  A  risk  is  run  for  which 
there  is  no  compensation."  ^ 

"Under  the  tax  method  the  rich  and  moderately  rich  really 
shoulder  the  whole  burden  of  the  charge  that  is  laid  upon  them. 
Under  the  loan  method  they  do  not  do  this,  because  they  are 
compensated  afterwards  through  taxes  laid  for  that  purpose,  partly 
on  themselves,  but  partly  on  other  and  poorer  sections  of  the 
community."  ^^ 

"Prophetic  foreboding  that  labor,  having  paid  once  for  the 
war,  must  now  pay  a  second  time  to  those  lending  for  the  war, 
is  in  the  fatal  way  of  fulfilment.  The  bonds  that  had  been 
purchased  out  of  the  margins  contributed  by  labor  become  a  valid 
obligation  against  the  laborer  as  taxpayer."  ^^ 

Such  are  the  views  of  the  advocates  of  financing  a  war  entirely 
by  taxation. 

3.  Effects  of  loan  policy  in  war  of  1812 — During  the 
World  War  the  policy  of  relying  on  loans  has  had  very  unfavor- 
able after-war  effects  in  Italy,  Germany  and  France.  Indeed, 
few  wars  of  history  have  been  financed  exclusively  by  loans.  In 
American  history  an  excellent  illustration  of  the  failure  of  the 
loan  policy  may  be  found  in  the  financing  of  the  War  of  1812. 
In  his  report  for  the  years  1808  and  1 809,  and  in  subsequent 
papers,  Secretary  Gallatin  gave  it  as  his  policy  that  "no  internal 

"Patten,  S.  N.,  ibid. 
*"  Pigou,  A.  C,  ibid. 
"  Davenport,  H.  J.,  ibid. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  13 

taxes  either  direct  or  indirect  are  contemplated.  .  .  .  Loans  reim- 
bursable after  the  return  of  peace,  must  constitute  the  principal 
resources  for  defraying  the  extraordinary  expenses  of  the  war.  .  .  . 
So  long  as  the  public  credit  is  preserved  and  a  sufficient  revenue 
is  provided,  no  doubts  are  entertained  of  the  possibility  of  pro- 
curing, on  loan,  the  sums  wanted  to  defray  the  extraordinary 
expenses  of  a  war.  ...  In  proportion  as  the  ability  to  borrow  is 
diminished,  the  necessity  of  resorting  to  taxation  is  increased."  ^^ 

The  results  of  the  loan  policy  were  well  nigh  disastrous.  The 
amounts  taken  by  the  public  declined  as  successive  loans  were 
put  out  and  the  cash  realized  grew  ever  smaller,  part  of  the  fourth 
loan  being  put  out  at  from  65  per  cent  to  69  per  cent  of  the  par 
value.  Furthermore,  when  the  public  would  no  longer  take  govern- 
ment bonds,  treasury  notes  were  put  out  in  increasing  amounts 
and  these  too  were  issued  at  ever  lower  prices  or  at  decreasing 
yields.  The  failure  of  this  policy  became  most  evident  when  there 
was  subscribed  only  about  $750,000  of  the  balance  of  over  $12,- 
000,000  authorized  by  the  Act  of  March  24,  181 4. 

The  loan  policy  of  Gallatin  was  opposed  by  the  advocates  of 
a  limited  taxation  policy.  The  chairman  of  the  Committee  of 
Ways  and  Means,  Mr.  Bacon,  foresaw  at  the  very  beginning  of 
the  war  the  inherent  difficulties  of  the  loan  policy.  He  said,  "If 
we  yield  to  the  new  theory  of  borrowing  both  principal  and 
interest,  we  have  no  data  by  which  to  judge  upon  what  probable 
terms  loans  may  be  obtained  at  all,  or  how  long  it  will  be  before 
we  must  wind  up  business."  ^^  The  acting  Secretary  of  the 
Treasury,  Mr.  Jones,  advocated  war  taxes  primarily  to  support  the 
loan  policy  of  the  government,  and  said,  "As  reliance  must  be  had 
upon  a  loan  for  the  war  expenses  of  the  year  1814,  the  laying 
of  the  internal  taxes  may  be  considered,  with  a  view  to  that  object, 
as  essentially  necessary ;  in  the  first  place  to  facilitate  the  obtaining 
of  the  loan;  and  secondly  for  procuring  it  on  favorable  terms."  " 

Finally,  Gallatin's  successor,  Dallas,  pointed  out  that  "the 
plan  of  finance  which  was  predicated  upon  the  theory  of  defraying 
the  extraordinary  loan  expenses  of  the  war  by  successive  loans,  had 

''Adams,  H.  C,  Life  of  Gallatin,  and  other  sources  quoted  in  Public 
Debts,  ibid. 

"Annals  of  Congress.  12th  Con.,  1st  sess.,  col.  1098,  quoted  by 
Adams,  ibid. 

"Annals  of  Congress.  12th  Con.,  and  sess.,  col.  896. 


14  INTERNATIONAL   FINANCE    AND    ITS    REORGANIZATION 

already  become  inoperative,  .  .  .  owing  to  the  inadequacy  of  our 
system  of  taxation  to  form  a  foundation  of  public  credit."  ^^ 

The  financial  record  of  the  War  of  i8i2  shows  the  weakness 
of  the  policy  of  raising  money  by  loans  exclusively.  It  resulted  in 
a  decline  of  the  national  credit,  in  a  deficit  in  the  last  quarter  of 
1814,  and  in  the  abandonment  of  the  policy  in  the  midst  of  the 
war. 

(b)    Taxation — 

1.  The  ARGUMENT  FOR  TAXES — Several  economists  both  in 
Great  Britain  and  in  the  United  States,  advocated  that  the  war 
should  be  financed  mainly  if  not  entirely  from  the  proceeds  of  taxes. 
Taxes  curtail  the  spending  power  of  the  community  and  therefore 
create  less  inflation.  Furthermore,  the  curtailment  by  legislation  of 
civilian  demand  and  of  luxury  expenditures  releases  funds  for 
taxation  and  simultaneously  compels  conversion  of  plants  to  war 
uses.  While  the  total  output  during  the  war  is  greater  than  during 
peace,  yet  essential  industries  usually  sufifer  for  lack  of  labor  and 
material  because  spending  power  is  not  sufHciently  curtailed  by 
taxes.     Taxes  hasten  military  preparation. 

Heavy  war  taxes  are  a  lighter  burden  than  they  seem  because 
of  the  war  psychology  and  of  the  devotion  to  the  nation's  interest. 
Wages  and  profits  in  many  industries  are  high  and  the  profit 
motive  is  replaced  by  national  motives.  Furthermore,  the  limita- 
tion on  the  investment  of  capital  makes  it  possible  for  the  state  to 
take  an  unusually  large  percentage  of  the  surplus  for  current  con- 
sumption. During  a  war  state  control  prevents  the  escape  of 
taxable  capital  from  the  country.  Low  taxes  during  the  war  mean 
high  taxes  after  the  war  when  the  reconstruction  needs  of  countries 
are  great.  Finally,  in  a  period  of  inflation  taxes,  based  on  ability 
to  pay,  are  easily  borne.  If  they  are  not  levied  during  the  war, 
taxes  imposed  later  to  meet  the  interest  on  bonds  bear  heavily  upon 
the  community  during  a  period  of  deflation  when  the  taxpayer 
turns  over  to  the  bondholder  a  dollar  of  larger  purchasing  power 
than  that  loaned.  War  loans  involve  a  redistribution  of  wealth 
*  after  the  war  in  favor  of  the  war  profiteer. 

2.  The  argument  against  taxes — ^The  arguments  against 
very  heavy  taxation   are  both  theoretical  and  practical.     A  very 

"Life  and  Writings  of  Dallas.    Quoted  in  Adams,  ibid. 


PRINCIPLES    AND   PRACTICE    IN   THE   WORLD   WAR  1 5 

heavy  tax  would  compel  borrowing  and  thus  lead  to  some  inflation. 
To  the  extent  that  these  borrowings  exceed  the  normal  borrowings 
in  time  of  peace,  inflation  must  result.^**  Furthermore,  heavy  taxes 
on  business  enterprises  during  the  war  may  at  the  very  moment 
when  maximum  output  is  needed  repress  production  and  thus 
reduce  rather  than  enlarge  the  social  surplus.  Excessive  taxes  may 
injuriously  lower  the  standard  of  living  and  may  dry  up  the 
sources  of  funds  for  the  support  of  social  activities  not  recognized 
by  the  state.  High  taxes  which  would  seriously  curtail  consump- 
tion might  create  resentment  and  opposition  on  the  part  of  the 
community  and  break  the  morale  needed  for  victory,  even  though 
a  similar  or  greater  burden  resulting  from  rising  prices  would  be 
accepted  with  resignation.  Inflation  is  a  financial  anesthetic  which 
makes  the  pain  of  reducing  one's  purchasing  power  tolerable. 
High  taxes  demand  the  fortitude  of  the  old-fashioned  surgical 
operations. 

But  the  chief  objection  to  an  all-tax  policy  is  the  matter  of 
administration.  Heavy  taxes  would  involve  industrial  chaos  and 
even  bankruptcy,  so  that  the  receipts  from  taxation  in  practice 
would  be  far  less  than  the  estimates.  Furthermore,  a  program  of 
taxes  requires  an  interval  for  their  accumulation  and  collection, 
but  wartime  demands  are  immediate  and  must  be  met  before  taxes 
can  be  obtained. 

As  a  matter  of  administration  heavy  taxes  increase  the  difH- 
culties  of  collection  and  evasion  is  proportional  to  the  pressure  of 
the  tax.  Since  a  war  cannot  be  financed  entirely  by  taxation,  taxes 
should  not  be  so  heavy  as  to  Interfere  with  the  Issue  of  necessary 
loans. 

3.  Conclusions — ^The  use  of  taxes  in  financing  a  war  appears 
as  an  indispensable  adjunct  to  a  loan  policy.  If  taxes  are  adequate 
to  meet  the  interest  on  all  its  loans,  a  nation's  credit  remains 
unimpaired.  But  in  addition  to  this  function,  a  taxation  policy 
may  be  used  for  defraying  part  of  the  expenses  of  the  war.  If  a 
country  has  a  broad  and  diversified  scheme  of  taxation.  In  which 
the  levies  are  light  during  times  of  peace,  it  is  In  an  excellent  posi- 
tion to  expand  the  existing  system  by  increasing  the  rate  of  taxation ; 
but  In  addition  new  channels  of  taxation  must  be  tapped,  primarily 

"  Scott,  W.  R.,  and  Pigou,  A.  C,  ibid. 


l6  INTERNATIONAL   FINANCE   AND   ITS    REORGANIZATION 

such  as  are  adapted  to  the  economic  conditions  during  the  war,  such 
as  may  without  injustice  or  hardship  be  abandoned  after  the  war, 
or  may  be  used  in  the  rapid  retirement  of  the  debt. 

1(c)   Combination  of  Loans  and  Taxes 

I.  Theory — Theoretically,  a  war  could  be  best  financed  by 
taxation.  Practically,  such  a  plan  is  impossible.  To  take  the 
entire  social  surplus  for  the  use  of  the  state  would  imply  that  we 
have  a  socialist  state,  that  the  social  motive  had  completely  dis- 
placed the  individual  motive.  But  under  the  present  regime  the 
motive  of  self  interest  still  functions.  Wars  cannot  be  financed 
entirely  by  taxes.  Theoretically  the  socialist  state  might  finance  a 
war  correctly.  But  theoretically  socialist  states  will  not  fight. 
Apparently,  therefore,  the  states  of  the  modern  order  that  do  fight, 
must  in  financing  their  wars  cause  suffering  to  the  poor  of  the 
war-waging  generation  and  of  the  bond-redeeming  generations. 
"Why  we  are  content,  in  the  beginning,  with  socializing  for  war 
only  within  the  narrow  limits  of  the  military  forces  is  probably  not 
hard  to  explain.  We  know  that  the  present  economic  system  works 
and  we  think  we  know  how  it  works.  We  have  faith  that  we  can 
get  immediate  results  by  using  the  driving  power  of  love  of  gain, 
or  at  least  by  giving  a  money  reward  to  those  who  make  war 
products.  Any  radically  different  scheme  of  industrial  organiza- 
tion for  war,  substituting,  as  it  would,  new  and  untried  motives 
of  human  action  for  the  old  and  tested  springs  of  action,  would 
be  experimental.  The  building  of  an  entirely  new  industrial  system 
would  require  time,  time  which  we  can  ill  spare  in  the  rush  of 
war  preparation.  Then,  too,  the  consequences  of  the  possible 
failure,  during  war,  of  such  an  experiment  are  too  awful  to  con- 
template." ^^ 

The  difference  between  loans  and  taxes  as  methods  of  financing 
a  war  disappear  if  the  after-war  taxation  has  the  same  incidence 
as  war-time  taxes  would  have  under  a  just  all-tax  plan.  The 
danger  is  that  the  vested  interests  may  be  able  to  shift  the  burden 
to  the  poor  and  politically  impotent  and  unorganized  classes.  In 
other  words,  the  theoretical  benefits  of  an  all-tax  policy  of  war 
finance  may  be  secured  by  an  equitable  tax  scheme  after  the  close 
of  the  war.    Since  moderate  taxes  after  the  war  can  be  made  more 

"  Plehn,  Carl  C,  ibid. 


PRINCIPLES   AND  PRACTICE   IN  THE   WORLD  WAR  1 7 

just  and  less  escapable  than  heavy  and  hastily  prepared  tax  schemes 
during  the  war,  the  leading  objection  to  the  loan  policy  of  war 
finance  falls  to  the  ground. 

Under  the  present  economic  order,  the  individual  must  be  per- 
mitted to  retain  a  portion  of  his  surplus  income  in  order  to  stimulate 
him  to  effort.  The  state  can,  however,  obtain  the  benefits  that 
would  accrue  to  it  under  an  all-tax  policy,  by  preventing  its  citizens 
from  wasting  their  surplus,  by  regulating  capital  issues,  by  restrict- 
ing lending  abroad,  by  conserving  bank  credit,  by  liquidating  assets 
held  abroad,  and  by  forced  loans  to  take  up  the  surplus  income. 

In  conclusion,  it  may  be  said  that  under  the  present  economic 
regime  wars  must  be  financed  partly  by  loans  and  partly  by  taxes. 
No  tax  scheme  can  be  perfectly  just.  A  loan  scheme  may  be  less 
inequitable  than  some  tax  programs.  Taxes  reach  only  the  honest 
rich.  Thedishonest  rich  or  social  slacker  dodges  the  tax.  Loans  bring 
to  the  service  of  the  warring  nation  funds  from  the  tax  dodger 
and  reach  the  large  number  of  tax-exempt.  Loans  filter  into  nooks 
where  taxes  cannot  reach.  Inflation,  whether  by  bonds  or  by 
deposits  or  by  paper  currency,  hits  everybody,  rich  or  poor,  regard- 
less of  ability  to  pay.  We  have  not  yet  learned  how  to  finance  a 
war  without  using  all  three  methods,  taxes,  loans  and  inflation. 

2.  The  PRACTICE — There  are  several  principles  which  deter- 
mine the  relative  reliance  upon  loans  and  taxes  in  the  financing  of 
a  war.  Primarily,  the^  war  must  have  popular  support.  The 
political  principle  underlying  the  financing  of  the  war  must  be 
rooted  in  the  hearts  of  the  people,  so  that  the  patriotic  appeal  may 
be  made  effectively,  even  at  the  expense  of  economic  considerations. 
Again,  the  fiscal  principle  is  important,  that  the  financing  of  war 
should  be  merely  a  development  of  the  peace-time  fiscal  program. 
The  weakness  in  Germany's  financing  of  the  World  War  was  the 
lack  of  power  on  the  part  of  the  federal  government  to  levy  an 
income  tax.  French  fiscal  policy  during  the  war  was  hampered 
because  the  income-tax  program  put  into  effect  before  the  war  had 
not  been  perfect  in  its  administrative  details.  The  brilliant  success 
of  America's  war  financing  was  due  to  the  almost  providential  in- 
auguration of  the  income  tax  in  19 13.  Britain's  time-tested  income 
tax  was  the  backbone  of  her  financial  structure.  Finally,  the 
psychological  element  is  important.  Steep  taxes  are  borne  willingly 
if  the  rates  are  gradually  raised  to  a  high  level  which  would  call 


l8  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

forth  Strong  protests  if  levied  suddenly.  The  confidence  of  the 
people  and  their  approval  of  the  war  aims  are  the  limits  within 
which  the  fiscal  policy  of  the  war  must  be  framed. 

In  considering  the  apportionment  of  loans  and  taxes  in  the 
financing  of  a  war,  the  prime  principle  that  operates  is  that  loans 
and  public  credit  are  always  a  means  of  anticipating  assured  revenue. 
Assuming  a  suitable  sj'stem  of  taxation,  public  funds  may  be  ob- 
tained soon  after  the  beginning  of  a  war.  During  the  transition 
period  at  the  outbreak  of  war  taxation  should  be  light  so  as  to 
permit  the  rapid  adjustment  of  industry  to  the  war-time  program. 
Subsequently,  however,  the  rates  of  existing  taxes  should  be  in- 
creased and  new  taxes  instituted  to  meet  as  much  of  the  extra- 
ordinary expenditures  of  the  war  as  is  possible,  to  the  limit  that 
war-time  production  is  not  curtailed. 

In  short,  a  sound  financial  program  for  the  conduct  of  the  war 
requires  first,  that  taxation  be  adequate  to  meet  the  interest  on  the 
growing  debt  so  that  the  government  may  preserve  its  credit  unim- 
paired and  support  the  price  of  its  outstanding  securities,  and  second, 
that  as  much  of  the  extraordinary  expenditures  of  the  war  as  is 
possible  must  be  met  out  of  extraordinary  revenues,  out  of  war 
taxes.  The  rest  of  the  funds  may  be  raised  by  loans.  Loans  should 
bridge  the  gap  between  war  expenditures  and  war  taxes.  These 
may  be  issued  continuously,  or  in  drives  within  limited  periods. 
Again,  temporary  loans  may  be  issued  in  anticipation  of  tax  receipts 
or  in  anticipation  of  the  proceeds  of  long-term  bonds.  The  tax 
program  if  carefully  planned  at  the  beginning  of  a  war  may  be  so 
elastic  as  to  stand  unchanged  until  the  conclusions  of  hostilities. 
However,  as  between  loans  and  taxes,  the  burden  during  war  should 
be  gradually  shifted  from  loans  to  taxes  short  of  the  point  of  inter- 
fering with  the  production  of  goods  essential  to  the  conduct  of  the 
war. 

B.  National  Wealth  and  War  Debts 

In  considering  the  relation  of  national  wealth  and  war  debts, 
one  must  make  allowance  for  several  sources  of  error. 

i.  National  Wealth 

The  figure  for  national  wealth  is  taken  to  be  the  sum  of  the 
wealth  of  the  individuals  in  the  country.     However,  this  is  not  an 


PRINCIPLES  AND  PRACTICE   IN   THE   WORLD  WAR  1 9 

accurate  standard.  The  wealth  of  a  nation  is  not  fixed.  It  depends 
not  only  upon  its  natural  resources,  but  also  upon  its  human  re- 
sources and  its  economic  policy.  The  wealth  of  a  nation  may  rise 
or  fall  depending  upon  a  change  in  any  of  these  factors.  The 
growth  of  Germany  in  the  two  generations  before  the  war  and  the 
decline  of  Spain  and  Portugal  from  their  position  of  leadership  in 
the  sixteenth  and  seventeenth  centuries  serve  to  indicate  upon  how 
many  conditions  the  wealth  of  a  nation  depends. 

Before  attempting  to  interpret  figures  of  public  debt  and 
national  wealth  or  of  debt  charges  and  national  income,  it  would  be 
well  to  investigate  the  accuracy  of  the  figures.  Their  value  would 
be  nil  if  the  error  in  the  determination  of  any  one  figure  would  be 
greater  than  the  difference  between  the  corresponding  figures  for 
two  countries.  The  sources  of  error  have  been  pointed  out  by  J. 
S.  Stamp,  in  his  "British  Income  and  Property"  (1916),  and  in  his 
paper  "The  Wealth  and  Income  of  the  Chief  Powers."  ^*  There 
are  differences  in  the  definition  of  wealth  and  of  income  and  there 
are  differences  in  the  methods  of  determining  them.  There  is  a 
subjective  aspect  to  estimates  of  wealth.  Cowrie  shells  have  higher 
value  for  savages  than  a  Rembrandt  has.  Again,  objectively  is 
the  national  wealth  of  a  nation  the  sum  total  of  the  personal  wealth 
of  the  inhabitants,  or  is  the  national  debt  to  be  deducted  therefrom? 
Furthermore,  the  wealth  of  the  country  may  be  regarded  as  the 
sum  total  of  goods  within  its  boundaries.  Some  economists,  like 
J.  Ellis  Barker, ^^  would  include  the  undeveloped  natural  resources, 
or,  it  might  be,  the  wealth  of  the  inhabitants,  including  their 
foreign  possessions  but  excluding  the  wealth  within  the  country 
held  by  aliens.  In  addition,  estimates  of  wealth  would  vary  with 
the  degree  of  ownership  from  undisputed  possession  of  personal 
property  through  the  various  stages  of  part  interest,  trusteeship,  and 
communal  wealth.  Finally,  any  periodic  or  accidental  fluctuation 
in  prices  or  in  value  would  affect  the  figures  of  national  wealth. 
Income,  on  the  other  hand,  would  be  subject  to  errors  in  estimating 
such  earnings  as  are  not  paid  for  in  money,  as  of  women  and 
other  members  of  the  family  in  the  home. 

Even  if  some  common  definition  of  wealth  and  of  income  were 
agreed   upon    in   the  several   countries,   there   would   still    remain 

"^The  Journal  of  the  Royal  Statistical  Society,  July,  1919. 
"Nineteenth  Century,  May,  1918,  p.  928.     Reprinted  in  his  "Economic 
Statesmanship,"  New  York,  E.  P.  Dutton  &  Co.,  1919, 


20  INTERNATIONAL    FINANCE    AKD   ITS    REORGANIZATION 

errors  arising  from  the  differences  in  the  methods  of  determination. 
Data  based  on  taxation  statistics  are  subject  to  errors  resulting  from 
evasions  of  the  tax,  omission  of  certain  forms  of  wealth  or  income 
from  the  tax  scheme,  and  variation  in  the  ratio  of  income  to 
capital.  Income  and  wealth  estimates  based  on  the  returns  in  the 
annual  taxation  of  capital  are  subject  to  local  variation  and  to 
differences  in  method  of  assessment.  Inheritance-tax  figures  have 
Inherent  sources  of  error,  when  used  as  a  basis  for  the  determination 
of  national  wealth.  The  inventory  method,  used  in  the  American 
census,  does  not  account  for  foreign  ownership,  omits  some  forms 
of  wealth,  counts  some  items  twice,  and  divorces  earnings  from 
capitalization.  Finally,  the  scientific  "census"  method  calls  for  a 
statement  of  wealth  and  income  from  every  resident,  and  in  this 
method  also  there  are  several  sources  of  gross  error.  Therefore, 
figures  of  national  wealth  must  be  used  with  reservations. 

ii.  Real  Wealth  and  the  Paper  Debt 

The  estimated  national  wealth  of  the  belligerents  amounted  to 
about  $600,000,000,000.  The  war  debt  is  approximately 
$220,000,000,000.  However,  the  inference  that  three-eighths  of 
the  wealth  of  the  belligerents  has  been  destroyed,  is  unwarranted. 
Have  lands,  forests,  mines,  factories,  homes,  ships,  railroads,  stocks 
on  hand  and  cash,  all  assets  been  three-eighths  destroyed?  The 
primary  source  of  error  is  in  the  fluctuation  in  the  unit  of  value. 
The  present  units  of  currency  have  not  the  same  purchasing  power 
as  they  had  before  the  war.  In  other  words,  the  unit  in  terms  of 
which  the  war  debt  is  expressed  is  not  the  same  as  that  in  terms  of 
which  the  pre-war  national  wealth  is  figured.  With  some  of  the 
currencies  in  Europe  depreciated  over  90  per  cent  in  terms  of  the 
dollar,  it  is  grossly  inaccurate  to  assume  that  the  war  cost  repre- 
sents any  such  fraction  of  the  national  wealth  as  the  figures  would 
seem  to  indicate. 

Part  of  the  debt  was  incurred  to  meet  the  needs  of  the  com- 
munity for  food  and  clothing,  which  would  have  had  to  be  satis- 
fied in  times  of  peace.  This  inevitable  consumption  was  not  a 
loss,  except  insofar  as  the  consumption  was  greater  during  war 
than  during  peace.  The  mere  fact  that  these  goods  were  purchased 
collectively  instead  of  by  individuals,  that  they  were  paid  for  by 
the  state  instead  of  by  the  consumer  himself,  does  not  mean  that 
such  consumption  represents  a  loss.     Furthermore,  the  obsolescence 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR       21 

of  machinery,  and  the  depredation  of  the  national  plant  do  not 
represent  entirely  a  war  loss,  for  they  take  place  during  peace  as 
well  as  during  war.  In  aligning  the  national  energies  to  the  pro- 
duction of  essentials,  like  food  and  clothing,  there  is  a  diversion  or 
a  transfer  of  the  forms  of  wealth.  The  subjective  element  enters 
here.  Since  the  standards  of  peace  differ  from  the  standards  of 
war,  it  is  not  sound  to  argue  that  the  production  in  times  of  war 
of  goods  not  used  in  times  of  peace  constitute  waste  entirely,  for 
to  some  extent  new  or  substitute  satisfactions  replace  the  old. 
Of  course  to  a  large  extent  war-time  industrial  production  consti- 
tutes outright  waste  as  in  the  manufacture  of  munitions  of  war. 

On  the  other  hand,  the  decline  in  the  production  of  luxuries 
is  not  a  loss  of  wealth.  In  fact,  peace-time  extravagance  is  similar 
to  war-time  destruction,  so  far  as  the  national  wealth  is  concerned. 
As  a  compensation  for  the  losses  of  war  are  the  new  factories  built 
during  the  war  that  are  capable  of  being  utilized  for  peace  pur- 
poses. Again,  new  industries  are  developed  and  the  capacity  of 
old  ones  increased.  The  costs  of  the  war  are  met  by  increasing 
the  nation's  productivity,  by  reducing  consumption  and  thus  in- 
creasing the  surplus.  Production  is  maintained  by  reason  of  the 
replacement  of  men  by  women  and  children.  To  the  extent  that 
decreased  production  is  balanced  by  decreased  consumption  there 
is  no  loss  of  national  wealth  except  where  the  decline  in  consump- 
tion cuts  into  the  nation's  vitality. 

The  real  loss  in  national  wealth  consists  of  the  loss  of  man- 
power, by  death  or  incapacity.  Again,  some  of  the  capital  accumu- 
lated in  the  past  is  destroyed, — cities,  cathedrals,  ships,  railroads 
and  other  capital  goods,  or  the  means  of  production.  The  loss  of 
territory  and  of  natural  resources  may  be  regarded  as  a  loss  to  a 
particular  country,  but  it  does  not  constitute  a  world  loss,  except 
insofar  as  the  losing  country  may  be  better  able,  temporarily  or 
permanently,  to  utilize  or  develop  them.  The  great  material  loss 
of  war,  however,  consists  of  the  loss  of  current  production,  war 
materials,  powder,  shells,  and  munitions.  These  goods  do  not 
satisfy  reduced  or  substitute  needs.  They  represent  a  dissipation 
of  national  assets.  Furthermore,  the  failure  to  produce  an  annual 
surplus  of  goods  out  of  current  production  which  the  nations  had 
been  accumulating  before  the  war  at  the  rate  of  ten  billion  dollars 
per  year,  is  a  very  large  loss.  The  national  wealth  was  destroyed 
insofar  as  the  future  productivity  of  the  world  was  reduced  by 


22  INTERNATIONAL    FINANCE   AND   ITS    REORGANIZATION 

undernourishment  of  the  population  or  the  development  of  internal 
economic  disorder.^" 

In  discussing  national  debt  in  its  relation  to  national  wealth  a 
distinction  must  be  drawn  between  the  domestic  and  the  foreign 
debt.  A  foreign  debt  requires  annual  interest  payments  which  may 
be  effected  by  an  exportation  of  goods,  and  to  that  extent  the  debt 
represenfs  a  diminution  of  the  real  wealth  of  a  country.  But 
an  internal  debt  is  a  paper  debt ;  it  does  not  diminish  the  wealth  of 
the  nation  as  a  whole.  Repudiation  of  the  internal  debt,  a  capital 
levy,  or  a  scaling  down  of  values,  would  leave  the  nation's  wealth 
unaffected  although  it  might  disturb  the  economic  condition  of  the 
country.  A  paper  debt,  held  internally,  never  ruined  a  country. 
During  the  Revolution  France  repeatedly  repudiated  her  debt,  and 
yet  at  the  end  of  the  period  was  undoubtedly  richer  than  at  the 
beginning.  On  the  other  hand,  the  loss  of  capital  goods,  the  wealth- 
producing  resources,  has  ruined  nations  in  the  past.  During  the 
Thirty  Years'  War  the  population  of  Germany  was  greatly  reduced 
and  the  national  equipment,  the  farms,  and  the  industrial  centers 
were  largely  ruined.  The  Arabian  Empire  was  destroyed  when 
the  Turks  demolished  the  irrigation  system  of  Mesopotamia  upon 
which  its  agriculture  depended.  The  wealth  of  Venice  was  de- 
stroyed when  the  change  in  trade-routes  from  the  Mediterranean 
to  the  Atlantic   depreciated  the  importance  of  her  facilities. 

iii.  The  Future  Outlook 

History  shows  that  the  rate  of  increase  of  wealth  in  the  past 
has  been  far  more  rapid  than  that  of  the  increase  in  the  public 
debt.  The  national  debts  that  staggered  the  statesmen  that  in- 
curred them  were  lightly  borne  by  later  generations,  Macaulay 
quotes  the  wailing  of  British  statesmen  in  the  seventeenth  and 
eighteenth  centuries  because  of  the  seemingly  stupendous  debts 
which  they  incurred  or  which  were  left  to  them  to  handle. 

"  *A  million  a  year  will  beggar  us,'  said  the  patriots  of  1 640. 
'Two  millions  a  year  will  grind  the  country  to  powder,'  was  the 
cry  in  1660.  'Six  millions  a  year  and  a  debt  of  ten  millions!'  ex- 
claimed Swift;  'the  high  allies  have  been  the  ruin  of  us.'  'A 
hundred  and  forty  millions  of  debt!'  said  Junius:  'well  may  we 
say  that  we  owe  Lord  Chatham  more  than  we  shall  ever  pay,  if 
we  owe  him  such  a  load  as  this.'  'Two  hundred  and  forty  millions 
of  debt,'  cried  all  the  statesmen  of  1783  in  chorus;  'what  abilities 
*  Kriegskosten  und  Volksvermogen,  ibid. 


PRINCIPLES    AND   PRACTICE    IN   THE   WORLD   WAR 


23 


or  what  economy  on  the  part  of  ministers  can  save  a  country  so 
burdened?'  .  .  . 

"Such  was  the  origin  of  that  debt  which  since  has  become  the 
greatest  prodigy  that  ever  perplexed  the  sagacity  and  confounded  the 
pride  of  statesmen  and  philosophers.  At  every  stage  in  the  growth 
of  that  debt  the  nation  has  set  up  the  same  cry  of  anguish  and 
despair.  At  every  stage  in  the  growth  of  that  debt  it  has  been 
seriously  asserted  by  wise  men  that  bankruptcy  and  ruin  were  at 
hand.  Yet  still  the  debt  went  on  growing;  and  still  bankruptcy 
and  ruin  were  as  remote  as  ever.  .  .  , 

"We  know  that  if  since  1783  no  fresh  debt  had  been  incurred, 
the  increased  resources  of  the  country  would  have  enabled  us  to 
defray  that  debt  at  which  Pitt,  Fox  and  Burke  stood  aghast. 
Nay,  to  defray  it  over  and  over  again,  and  that  with  much  lighter 
taxation  than  that  which  we  have  actuallj'^  borne.  On  what  prin- 
ciple is  it  that  when  we  see  nothing  but  improvement  behind  us,  we 
are  to  expect  nothing  but  deterioration  before  us?  .  .  . 

"The  prophets  of  evil  were  under  a  double  delusion.  They 
made  no  allowance  for  the  effect  produced  by  the  incessant  progress 
of  every  experimental  science  and  by  the  incessant  efforts  of  every 
man  to  get  on  in  life.  They  saw  the  debt  grow,  but  they  forgot 
that  other  things  grew  as  well  as  the  debt.  They  greatly  overrated 
the  pressure  of  the  burden.  They  greatly  underrated  the  strength 
by  which  the  burden  was  to  be  borne."  ^^ 

The  debt  dwindles  as  the  resources  of  a  country  are  unlocked 
and  its  manufacturing  capacity  increased.  The  figures  of  the  public 
debt  and  national  w^ealth  of  Great  Britain  illustrate  this  point. 


National  wealth 
(in  million  pounds) 

Public  debt 
(in  million  pounds) 

Year 

Amount 

Year 

Amount 

1703 

1774 
1800 
1812 

1833 
1865 

1903 
1918 

490 
1,100 
1,740 
2,190 
3,750 
6,113 
15,000 
24,000 

1727 
1775 
1793 
1815 

1854 

1899 

1914 

(Mar.  31)  1918 

52 
127 
248 
861 
775 
599 
678 

5899 

^*  Macaulay's  History  of  England,  vol.  v,  ch,  xix,  pp.  2^84-2,286,  edited 
by  C.  H.  Firth,  Macmillan,  London,  1914. 


24 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


In  Other  words,  the  national  wealth  increased  three  times  in 
the  eighteenth  century  and  about  ten  times  in  the  nineteenth 
century,  or  thirty  times  in  200  years  from  1703  to  1903.  How- 
ever, the  national  debt  had  increased  about  thirteen  times  in  the 
same  period,  that  is,  prior  to  the  World  War.  A  similar  table 
covering  the  United  States  shows  the  same  difference  more 
strikingly.  The  national  wealth  increased  six  times,  but  the  public 
debt  declined  over  50  per  cent  in  50  years. 


Year 

National  wealth 
(in  million  dollars) 

Public  debt 
(in  million  dollars) 

1870 
1890 
1912 

30,069 

65,837 

187,739 

2331 

891 

1028 

The  universally  rapid  increase  in  the  wealth  of  nations  is  due 
to  the  increase  in  the  productivity  per  man  and  to  the  continuous 
depreciation  of  money,  owing  to  the  increase  of  the  gold  supply 
and  more  particularly  to  the  increase  in  the  forms  of  commercial 
credit.  The  increase  in  productivity  is  due  to  the  application  of 
engineering  to  industry,  to  standardized  production  and  to  auto- 
matic machinery.  The  depreciation  of  the  currency  even  in  times 
of  peace  is  an  historic  phenomenon. 

In  view  of  the  fact  that  the  war  debt  is  a  money  debt  and  also 
that  wealth  and  income  are  increasing  at  an  accelerated  rate,  the 
repayment  of  the  debt  will  ultimately  involve  as  little  a  burden  to 
later  generations  as  the  repayment  of  the  debt  of  the  Napoleonic 
Wars  did.  The  tax  revenues  of  Great  Britain  in  181 5  were  about 
70  million  pounds,  and  in  191 7-18  about  700  million  pounds. 
The  wealth  and  taxable  income  of  Great  Britain  increased  tenfold 
in  the  century  since  181 5.  More  striking  is  the  growth  of  the 
national  wealth  of  the  United  States,  which  increased  twenty-six- 
fold since  1850  and  three-hundred-and-forty-fold  since  1790.  If 
the  British  Empire  adopts  in  the  colonies  the  methods  used  by  the 
United  States  in  attaining  its  present  industrial  development,  the 
wealth  of  the  Empire  will  be  sixty  times  as  great  in  the  year  2000 
and  one  thousand  times  as  great  in  the  year  21 00  as  it  is  to-day. 
The  present  war  debt  will  then  appear  smaller  than  the  Napoleonic 
debt  appears  to  us.^^ 

**  Barker,  Ellis,  Britain's  True  Wealth  and  the  Unimportance  of  the 


PRINCIPLES   AND  PRACTICE  IN  THE  WORLD  WAR  2$ 

However,  as  deflation  follows  a  war,  the  burden  of  repayment 
of  debt  will  temporarily  increase.  The  money  which  is  repaid 
within  a  generation  will  have  a  greater  purchasing  power  than  that 
which  was  borrowed. 

C.  Statistics  of  Public  Finance 

i.  National  Wealth  and  Income 

In  a  consideration  of  the  question  of  the  debts  arising  from  the 
World  War,  the  figures  of  national  wealth  and  income  over  a 
period  of  years  are  of  interest.  In  addition  to  presenting  a  fairly 
accurate  picture  of  the  rate  of  growth  of  the  national  wealth  and 
income,  such  a  table  shows  the  relation  between  the  rate  of  growth 
of  the  national  debt  and  that  of  the  national  income. 

As  J.  C.  Stamp  points  out  in  his  careful  study,  "The  Wealth 
and  Income  of  the  Chief  Powers,-^  the  methods  of  computing 
national  wealth  and  income  are  based  on  so  many  diverse  factors 
and  are  calculated  in  so  many  different  w^ays  that  the  comparability 
of  the  figures  for  several  nations  may  well  be  challenged.  How- 
ever, granting  even  a  large  percentage  of  error,  the  rate  of  growth 
over  a  period  of  years  is  so  much  greater  than  the  probable  degree 
of  error,  that  a  series  of  figures  for  national  wealth  and  for  national 
income  for  the  same  country  are  not  without  significance.  Taking 
the  figures  for  the  last  quarter  of  the  eighteenth  century  as  a  basis, 
we  find  that  up  to  the  beginning  of  the  World  War  the  national 
wealth  of  Great  Britain  increased  about  fourteenfold  and  the 
national  income  about  nineteenfold.  On  the  other  hand  the 
national  debt  of  Great  Britain  at  the  beginning  of  the  World  War 
was  hardly  five  times  as  great  as  in  1763,  although  for  almost  a 
century  after  the  Napoleonic  Wars  the  debt  was  slowly  de- 
creased. The  actual  revenue  collected  in  the  United  Kingdom 
grew  twentyfold  from  the  middle  of  the  eighteenth  century  up 
to  1913. 

The  national  wealth  of  France  increased  sevenfold  from  1789 
to  1913,  and  the  national  income  increased  about  ninefold  in  the 
same  interval.     The  public  debt  of  France,  however,  increased 

War   Debt,   The    Nineteenth   Century,   July,    1918.     Also  his   "Economic 
Statesmanship,"  E.  P.  Dutton  &  Co.,  1919. 

^Journal  of  the  Royal  Statistical  Society,  July,  1919. 


26 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


about  twelvefold  from  1763,  more  rapidly  than  the  national  wealth. 
The  actual  revenue  increased  about  thirteenfold  from  1750  to  1913. 
The  growth  of  the  debt  from  1763  to  1914  was  about  the  same 
as  the  growth  of  the  income  and  of  the  actual  revenue  in  the  same 
period.  This  fact  is  due  to  the  many  wars  fought  by  France,  to 
the  maintenance  of  a  large  public  debt,  and  to  the  decline  of  com- 
mercial activity  and  influence. 

ESTIMATES  OF  NATIONAL  WEALTH  AND  INCOME  24 

National  Wealth  of  the  United  Kingdom 


Year 

Million 
dollars 

Relative 

figures 

Applying  to — 

Authority 

1660 

1,250 

23 

England  and  Wales 

Petty 

1703 

2,450 

44 

' ' 

Davenant 

1774 

5,500 

100 

' ' 

Young 

1800 

8,700 

158 

Great  Britain 

Beeke,  Edin. 

1812 

10,950 

198 

United  Kingdom 

Colquhoun 

1822 

13,000 

236 

Lord  Liverpool 

1833 

18,750 

340 

Pablo  Pebrer 

1840 

20,500 

373 

Porter 

i860 

29,800 

542 

(interpolated) 

1865 

30,565 

555 

Giffen 

187s 

42,740 

775 

188s 

50,185 

905 

" 

1888 

54,000 

982 

1913 

79,500 

1445 

Crammond 

1914 

70,500 

1280 

Stamp 

National  Income  of  the 

United  Kingdom 

Year 

Million 
dollars 

Relative  figures 

Applying  to — 

Per  capita 

1664 

210 

34 

England  and  Wales 

390 

1688 

225 

37 

^  * 

41.0 

1770 

610 

TOO 

" 

81. s 

1800 

1,150 

188 

130.0 

1822 

1,400 

230 

Great  Britain 

99.0 

1840 

2,520 

413 

United  Kingdom 

96.0 

i860 

3,800 

623 

131. 0 

1889 

6,425 

105s 

168.0 

1914 

10,900 

1790  (Stamp) 

238.0 

1914 

11,800 

1935  (Crammond) 

258.0 

"The  Dictionary  of  Statistics,  Michael  G.  Mulhall,  George  Routledge 
&  Son,  London,  4th  ed.,  1899,  pp.  320,  321,  589,  592;  also  Webb's  Supple- 
ment; Statesmen's  Year  Book;  Stamp,  J.  S.,  Wealth  and  Income  of  the 
Chief  Powers;  and  the  Statistical  Abstracts  and  Yearbooks. 


PRINCIPLES  AND  PRACTICE   IN   THE   WORLD  WAR  27 

National  Income  of  France  National  Wealth  of  France 


Authority 

Lavoisier 

Chaptal 

(interpolated) 

Guyot 

Girardin 

Wolowski 

Flaix 

Pupin 


Year 

Million 

Per 

Relative 

Year 

Million 

Relative 

dollars 

capita 

figures 

dollars 

figures 

1780 

800 

30.5 

100 

1789 

7,600 

100 

1800 

1080 

38.5 

135 

181S 

9,000 

119 

1820 

IS7S 

52.0 

197 

1820 

12,600 

166 

1840 

2400 

70.5 

300 

1826 

14,200 

187 

1868 

4030 

108.0 

504 

1853 
1871 

25,000 
3S,ooo 

329 
460 

1888 

5230 

139.0 

654 

1882 

45,550 

598 

1913 

7290 

184.3 

911 

1913 

58,300 

717 

ii.  Growth  of  Public  Debt  of  the  Nations 

In  the  two  centuries  from  17 13  to  1913,  the  public  debts  of 
the  countries  for  which  figures  are  known  increased  about  seventy 
times.  In  the  eighteenth  century  they  increased  about  fourteen 
times  and  in  the  nineteenth  century  about  five  times.  As  a  result 
of  the  World  War  they  increased  about  six  times.  The  growth 
of  public  debts  was  due  largely  to  war  and  to  preparation  for  war, 
and  to  a  less  extent  to  government-owned  public  improvements. 
The  growth  in  the  debt  from  1713  to  1 889  was  estimated  by  Mul- 
hall  to  be  divided  as  follows: 


Use 

Amount 
in  million  dollars 

Per  cent 

War  and  armaments 

18,050 

7,200 

3,900 

805 

60 

Railways  and  telegraphs 

24 

Roads  and  bridges     

13 
3 

Sundries 

Total 

29,955 

100 

The  increase  of  the  debt  of  the  nations  of  the  world  may  be 
seen  in  better  perspective  when  viewed  in  connection  with  the 
historic  process  of  inflation  of  the  currency  and  the  rise  in  com- 
modity prices.  Whereas  the  public  debt  of  the  principal  nations 
rose  from  about  $9,000,000,000  in  1848  to  about  $43,000,000,000 
in  19 1 3,  or  about  five  times,  the  gold  production  of  the  world  rose 
from  about  $13,000,000  per  annum  in  the  decade  1831-40  to 
$460,000,000  in   191 3,  about  thirty-five  times.     The  public  debt 


28 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


Public  Debt  of  the  Principal  Nations  ^ 
(in  million  dollars  omitted) 


1713 


1763 


1793 


1816 


1870 


1913 


Great  Britain. .  . 

France 

Germany 

Russia 

Austria 

Italy 

Spain 

Portugal 

Holland 

Belgium 

Denmark 

Sweden  and  Norway 

Greece 

Turkey 

Roumania 

Serbia 

Other  Europe 

Total  Europe .  . 

United  States 

Latin  America .... 

Canada 

Australia 

India 

Japan 

Egypt 

South  Africa 

Other  countries. . . . 

Total  World... 

Relative  figures.  .  . 


270 
240 


SO 
35 


735 
550 


1850 
160 

23s 
210 

100 

5 

350 

10 


4500 
700 
195 
725 
495 

125 

585 

35 

550 

60 


3865 
1300 

345 
450 
625 
180 

565 
no 

S70 

125 

60 

10 

SO 


595 


1415 


2920 
85 

45 


7970 
130 

145 


8255 

SO 
85 
25 

255 
10 


595 


141S 


3050 


8245 


8680 


42 


2l6 


583 


614 


4,005 

2,520 

740 

1,710 

1,700 

1,665 

1,425 

295 

380 

140 

65 

30 

90 

460 


15,225 

2,42s 
675 

85 
185 
S40 

50 
185 

10 


19,380 


1,372 


3,490 

6,345 

(a)  240 

3,780 

2,900 

2,300 

1,300 

565 

445 

385 

55 

100 

"5 

900 

180 

65 


3,486 

6,346 

1,177 

4,537 

3,799 

2,852 

1,814 

948 

462 

82s 

96 

259 
188 
667 

317 
126 

159 


23,165 

1,105 
1,665 
245 
855 
930 
250 
S15 
135 


28,058 

1,028 

2,396 

483 

1,429 

1,475 
1,242 

459 

573 

5,797 


28,865 


42,940 


2,039 


3,040 


(a)  Mulhall's  figure  for  the  German  debt  in  1889  is  equivalent  to 
2175  million  dollars.  In  view  of  the  small  debt  in  1870  and  the  large 
indemnity  received  from  France,  his  figure  is  obviously  incorrect.  The 
Statistical  Yearbook  of  the  German  Empire  gives  the  debt  on  March  31, 
1889,  as  loio  million  marks. 

of  the  world  rose  from  $3,000,000,000  In  1793  to  about 
$45,000,000,000  in  1 91 3  or  about  fifteen  times,  whereas  the  world 
supply  of  credit  probably  grew  sixty  fold  in  the  same  interval. 


"Figures   up   to   1889   are   taken  from  Mulhall,    pp.   260,   699.     The 
1913  figures  arc  taken  from  the  Statistical  Abstract  of  the  United  States. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD    WAR  29 

For  example,  the  deposits  of  the  Bank  of  England  in  February, 
1793,  were  about  £5  million'*'  and  on  July  29,  1914,  about  £65 
million,  of  public  deposits  and  about  £270  million  of  private  de- 
posits, an  increase  in  total  deposits  of  about  67  times.^^  The 
world's  debt  in  191 3  therefore  was  relatively  smaller  than  in  1793. 

iii.  The  Cost  of  Previous  Wars 

In  the  120  years  from  1793  to  191 3,  the  cost  of  wars  amounted 
to  over  $24,000,000,000,  or  about  three-fifths  of  the  difference  be- 
tween the  debts  of  the  world  at  the  two  dates.  The  expenditure 
of  the  United  States  in  former  wars  amounted  to  $5,692,000,000, 
distributed  as  follows: 

War  1812-1815,  with  Great  Britain  $   119,000,000 

War  with  Mexico,  1846-1849 173,000,000 

Civil   War,   1860-1865 3,478,000,000 

Spanish-American  War,   1897-1900 1,922,000,000 

The  cost  of  wars  to  Europe  in  the  same  interval  amounted  to 
about  $18,400,000,000  distributed  as  shown  in  the  table  on  page  30.-^ 

The  cost  of  the  World  War  was  over  six  times  as  great  as  the 
cost  of  all  the  wars  in  the  previous  120  years.  The  third  British 
war  loan  issued  in  19 17  was  almost  as  great  as  the  entire  cost  of  the 
22  years  of  war  with  France,  ending  in  181 5.  The  Fourth  Liberty 
Loan,  floated  in  October,  1918,  was  twice  as  great  as  the  total  cost 
of  the  Civil  War  and  greater  than  the  cost  of  the  Napoleonic  Wars. 
The  total  cost  of  the  wars  of  Europe  and  of  the  United  States 
from  1 793-1913  was  less  than  the  increase  in  the  debt  of  the 
British  Empire  during  the  World  War.  The  cost  of  the  wars  in 
Europe  during  the  same  period  was  about  half  of  Germany's  in- 
crease in  debt  during  the  World  War. 

iv.  Growth  of  World  Revenue 

The  rapid  increase  in  the  public  debt  in  the  past  two  centuries 
was  more  than  matched  by  the  increase  in  the  revenues  of  the 
principal  countries.    Whereas  in  the  period  from  1713  to  19 14  the 

^Report  of  Committee  on  Charter  of  Bank  of  England,  1831-2,  Ap- 
pendix No.  5,  presented  in  Canaan's,  The  Paper  Pound  of  1797-18^1. 
London:  P.  S.  King  &  Sons,  1919. 

^'  London  Economist. 

°*  Statement  of  the  Liberty  Loan  Bureau,  Treasury  Department, 
November  lo,  1917. 


30 


INTERNATIONAL    FINANCE   AND    ITS    REORGANIZATION 


Dates 


1793-1815 

1812-1815 

1828 

I 830- I 840 

1830-1847 

1848 


1854-1856 


1859 

1864 
1866 

1864-1870 
1865-1866 

1870-1871 

1876-1877 

1900-1901 

1904-1905 
1913 


Countries  engaged 

England  and  France 

France  and  Russia 

Russia  and  Turkey 

Spain  and  Portugal 

France  and  Algeria 

Revolts  in  Europe 

England 

France 

Sardinia  and  Turkey 

Austria 

Russia 

France 

Austria 

Italy 

Denmark,  Russia  and  Austria. . . 

Prussia  and  Austria 

Brazil,  Argentina  and  Paraguay. 
France  and  Mexico 

Germany 

France 

Russia 

Turkey 

Transvaal  Republic  and  England 

Russia  and  Japan 

Balkan  Wars 

Total 


Costs 


$6,250,000,000 
45 1 ,000,000 
100,000,000 
250,000,000 
190,000,000 

50,000,000 
371,000,000 
332,000,000 
128,000,000 

69,000,000 
800,000,000 

75,000,000 

127,000,000 

51,000,000 

36,000,000 
330,000,000 
240,000,000 

65,000,000 

954,000,000 
1,580,000,000 

807,000,000 
403,000,000 

1,000,000,000 

2,500,000,000 
1,264,000,000 


$18,423,000,000 


public  debt  of  the  principal  countries  of  the  world  increased  about 
72  times,  the  revenue  increased  122  times  from  1680  to  19 1 3. 
In  the  century  preceding  191 3  the  public  debt  increased  about  five 
times  and  the  revenue  increased  about  twelve  times.  In  other 
words  the  rate  of  increase  of  public  revenue  is  greater  than  the 
rate  of  increase  of  the  public  debt,  particularly  during  the  nineteenth 
century.  During  the  eighteenth  century  the  revenue  increased 
about  sixteenfold  and  the  public  debt  about  fourteenfold.  Several 
important  conclusions  may  be  drawn  from  these  facts.  First, 
wars  do  not  impoverish  the  world  permanently.  Again,  industrial 
development  proceeds  at  such  a  pace  that  the  public  revenues  may 
be   rapidly    increased.      This   would    indicate    that    governmental 


PRINCIPLES   AND   PRACTICE    IN   THE    WORLD   WAR  3 1 

policies,  fiscal  or  otherwise,  should  interfere  as  little  as  possible 
with  the  development  of  industry  in  order  that  the  growth  of 
wealth  may  in  itself  cause  the  burden  of  the  public  debt  to  diminish. 
One  may  not  conclude,  however,  that  war  pays,  for  the  growth  of 
wealth  in  the  nineteenth  century  was  due  to  scientific  and  technical 
achievements  and  not  so  much  to  the  grabbing  of  neighbors'  lands, 
for  this  constituted  merely  a  transfer  of  wealth  from  country  to 
country  and  not  a  net  increase  of  the  wealth  of  the  world.  Great 
Britain,  which  engaged  in  only  four  wars  from  1793  to  191 3, 
experienced  a  much  greater  increase  in  national  wealth  than  France, 
which  engaged  in  six  in  the  same  period. 

The  table  on  page  33  gives  the  revenues  of  the  principal  coun- 
tries of  the  world. 

That  the  world's  revenue  tends  to  increase  more  rapidly  than 
the  world's  debt  is  evident  in  a  comparison  of  the  ratio  of  revenue 
to  debt  in  1750  and  1889,  in  which  years  the  figure  was  about  16 
per  cent,  and  at  the  outbreak  of  the  World  War  when  the  ratio 
of  world  revenue  to  world  debt  was  about  25  per  cent.  The  period 
from  1750  to  1889  was  one  of  almost  continuous  warfare,  and 
therefore  of  mounting  debt.  Yet  the  growth  of  income  kept  pace 
therewith.  But  the  interval  from  1889  to  191 4  was  a  period  of 
relative  peace  and  therefore  while  the  debt  of  the  world  increased 
more  slowly,  the  revenue  rose  considerably. 

D.     Total  Cost  of  the  War  -^ 

The  estimate  of  the  cost  of  the  war  depends  upon  the  adoption 
of  a  national  or  world  point  of  view.  The  loss  to  one  country  of 
territory  or  of  natural  resources  constitutes  a  mere  transfer  of 
wealth,  so  far  as  the  world  is  concerned.  The  world  loses  as  a 
result  of  such  a  transfer  only  if  the  new  owners  for  any  reason  are 
unable  to  produce  additional  wealth  as  economically  as  the  former 
owners. 

^  Rapport  General,  Chambre,  France,  a  study  of  war  finance  of  the  chief 
belligerents,  No.  4133,   1918,  pp.  9-291   and  No.  6158,  1919,  pp.   5-300. 

Laughlin,  J.  Laurence,   Credit  of  the   Nations,   N.  Y.,   Scribners,   1919. 

Bogart,  E.  L.,  The  Direct  and  Lndirect  Costs  of  the  World  War. 
New  York:  Oxford  University  Press,  1919. 

Seligman,  E.  R.  A.,  The  Cost  of  the  War  and  How  It  Was  Met, 
American  Economic  Review,  ix:4,  739-770,  December,  1919. 

Gottlieb,  L.  R.,  Indebtedness  of  Principal  Belligerents,  Quarterly 
Journal    of   Economics,    xxxiii:3,    504-531,    May,    1919;    Debts,    Revenues 


32  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

I*.  Errors  in  Estimating  the  Cost 

The  intangible  costs  are  indeterminable.  The  loss  In  satisfac- 
tion of  human  wants  during  the  war,  the  pain  and  suffering  of  the 
combatants,  the  worry  and  grief  of  the  civilian  population,  the 
social  unrest  following  the  war,  and  the  obstructing  of  social 
progress  are  all  incapable  of  being  measured.  In  attempting  to 
estimate  not  the  indefinite  and  intangible  costs  of  the  war  but  the 
financial  cost  the  student  is  confronted  by  a  number  of  difficulties. 
Not  only  are  the  real  costs  impossible  to  appraise,  but  even  the 
money  costs  of  war  are  difficult  to  determine. 

(a)  The  Time  Factor — 

The  beginning  of  war  expenditures  may  be  fixed  at  a  definite 
date,  but  the  end  cannot  be  so  fixed.  The  expenditures  resulting 
from  war  do  not  end  with  the  cessation  of  hostilities,  with  the  de- 
mobilization of  the  armies,  nor  with  the  signing  of  the  treaty  of 
peace.  For  the  world  as  a  whole,  expenditure  resulting  from  war 
continues  until  the  ruins  are  repaired.  But  for  each  nation,  the 
war  cost  may  include  the  payment  of  reparation  to  other  countries 
and  the  payment  of  pensions  or  relief  moneys  to  its  own  inhabitants. 
It  is  not  scientifically  accurate  to  charge  to  the  cost  of  the  war  the 
expenditures  for  housing,  extension  of  railroads,  and  the  many 
other  accumulated  demands  of  normal  years,  the  satisfaction  of 
which  was  deferred  during  the  war.  But  the  excess  cost  of  these 
expenditures  above  normal  years  is  attributable  and  chargeable  to 
the  war. 

(b)  The  Currency  Factor — 

All  calculations  of  the  cost  of  the  war  are  subject  to  another 
serious  drawback.  No  measurement  of  quantity  can  be  accurate 
if  the  unit  in  terms  of  which  the  results  are  expressed  varies  con- 

and  Expenditures  and  Note  Circulation  of  Principal  Belligerents,  xxxivri, 
161-205,  November,  1919;  Les  Finances  d'Apres  Guerre,  Revue  de  Science 
et  de  Legislation  Financieres,  xviii:4,  pp.  613-713,  October,  1920. 

Ayres,  L.  P.,  The  War  with  Germany.  Washington:  Government 
Printing  Office,  1919. 

Jeze,  Gaston,  Les  Finances  de  Guerre,  Les  Methods  Financieres,  Les 
Emprunts  de  Guerre,  are  surveys  of  the  major  powers,  in  the  Revue 
de  Science  et  de  Legislation  Financieres,  1915-1920. 

Internal  War  Loans  of  the  Belligerent  Countries.  New  York:  National 
City  Company,  1918. 

See  also  the  sources  and  references  under  chapters  dealing  with  in- 
dividual countries. 


PRINCIPLES   AND   PRACTICE   IN   THE    WORLD   WAR 


33 


Revenues  of  the  Principal  Countries  ^° 
(in  million  dollars) 


Country 


1680 


1750 


I»IO 


1850 


1913 


United  Kingdom 

France 

Germany 

Russia 

Austria 

Italy 

Spain 

Portugal 

Sweden 

Norway 

Denmark 

Netherlands 

Belgium 

Switzerland 

Greece 

Turkey 

Other  Europe  (estimated). 

Total  Europe 


United  States 

Canada 

Mexico 

Cuba 

Argentina 

Brazil 

Chile 

Peru 

Venezuela 

Colombia 

India 

Persia 

Japan 

China 

South  Africa 

Egypt 

Australia 

Other  count  ies  (est.) 


Total  World. 
Relative  figures .  . 


10.6 
24.0 


75-0 


ISO 


90.0 


36 


46.0 
71 .0 
350 
8.0 
20.0 

7-5 
16.6 


14.9 


230.0 


279.0 
200.0 

57-S 
55-0 
52.0 
23.0 
30.0 
6.0 
50 

5-5 
24.0 


ISO 
18.0 


770.0 


9S 


i.o 
9.0 


78.0 


32.5 


291 .0 
25s  o 
119.  o 

195.0 

100.  o 
60.0 

57-5 
16.0 

7.S 
4.0 

7S 
29.0 

23 -5 

S-o 

50 

4S-0 

30.0 


442.5 

609.0 

336.0 

444.0 

3740 

360.0 

177.0 

42.0 

24.0 

12.0 

150 

50.5 

64- S 

145 

iS-5 

116. o 

70.0 


1250.0 

46.0 

5-S 
ISO 

7.S 
4S 

20.0 
50 

10. o 

2S 

2S 

138.0 

7-S 
25.0 
90.0 

2-5 

20.0 

4-S 
44.0 


3166.5 


403.0 
38.0 
27.0 

12.5 
27.0 

70.5 
25.0 

7-5 

S-o 

S-o 

276.0 

8.S 

65s 

130.0 

20.0 

48.5 
138.0 
126.5 


918.8 

914.6 

879.7 

1,832.5 

1,167s 

512.8 

224.9 

82.0 

73-4 

41 .6 

30.6 

91.8 

146.2 

19.0 

25  9 

134-3 

239 -7 


7,335-3 

1,014. 1 

168.7 

64s 

37-9 

I4S-3 

192.7 

72.4 

173 
10. 1 
14.1 

386.2 
10.  2 

292.  2 

193 -3 
84.6 

79-7 
285.7 
589.0 


250.0 


900.0 


1 700 . o 


4600.0 


10,993 -3 


360 


680 


1840 


4400 


"Mulhall's  Dictionary  of  Statistics,  4th  ed.,  pp.  257,  699,  revised  for 
India  and  Germany  by  comparison  with  figures  in  Statistical  Abstract  for 
India  for  1889-1890,  the  Statesman's  Yearbook,  1899,  and  the  Statistisches 
Jahrbuch  fuer  das  Deutsche  Reich.  The  1913  figures  are  taken  from 
the  Statistical  Abstract  of  the  United  States. 


34  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

tinually  during  the  process  of  measurement.  How  tall  would  the 
Woolworth  Building  be  if  the  unit  of  measurement,  the  foot,  be- 
came shorter  as  one  approached  the  top?  Or  what  would  be  the 
distance  between  New  York  and  Washington  if  the  mile  shrank 
in  length  while  one  measured?  Inflation  went  on  continuously 
during  the  war  and  for  a  while  after  its  close.  For  example  on 
February  28,  1920,  measured  in  terms  of  dollars  the  pound  sterling 
was  depreciated  30  per  cent,  the  French  franc  64  per  cent,  the 
Belgian  franc  62  per  cent,  the  lira  72  per  cent,  and  the  mark  96 
per  cent.  Or  measured  in  terms  of  internal  values  of  a  country, 
the  currency  depreciated  in  terms  of  other  commodities,  and  prices 
rose  continuously  and  caused  a  continuous  increase  in  expenditure 
as  the  war  continued.  The  increase  in  the  note  circulation,  which 
is  presented  below,  shows  the  unreliability  of  the  unit  of  currency 
as  a  measure  of  the  nominal  or  money  cost  of  the  war. 

(c)  The  Administrative  and  Accounting  Factors — 

The  technical  aspects  of  the  question  also  make  exact  determina- 
tion of  the  cost  of  the  war  difficult.  The  strain  of  war  played 
havoc  with  budget  calculations  so  that  they  no  longer  were  con- 
sistent or  comparable  with  peace-time  budgets.  Furthermore,  civil 
expenses  could  not  be  strictly  separated  from  military  expenses,  such 
as  wage  bonuses,  bread  subsidies,  and  civilian  relief.  Profits  or 
losses  from  operation  of  government  enterprise  were  ascribable  to 
the  war  in  some  instances  and  yet  were  not  so  shown.  Bonds  were 
offered  at  a  discount,  so  that  the  actual  cash  received  does  not  tally 
with  the  par  value  of  the  debt  which  is  counted  as  the  cost  of  the 
war.  Treasury'  bills  were  included  as  well  as  the  bonds  into  which 
they  were  converted,  or  the  taxes  for  which  they  were  receivable. 
In  addition  to  these  difficulties  in  estimating  the  cost  within  any 
given  country,  additional  complexities  arise  in  comparing  the 
figures  for  several  countries.  At  best  the  comparing  of  budgets 
must  lead  to  inaccurate  conclusions,  owing  to  a  lack  of  uniformity 
in  their  items.  Finally,  the  withholding  or  juggling  of  facts,  as 
best  served  the  expediencies  of  the  moment,  has  added  an  additional 
element  of  inaccuracy  in  the  determination  of  the  exact  amount. 

(d)  International  Aspects — 

While  the  cost  of  the  war  to  the  world  as  a  whole  will  not  be 
affected  if  international  obligations  are  not  carried  out,  the  cost 


PRINCIPLES    AND   PRACTICE    IN   THE    WORLD   WAR  35 

to  individual  nations  will  greatly  vary.  If  Germany  does  not  pay 
the  reparation  charges  to  Belgium  and  to  France  the  cost  of  the  war 
to  each  one  of  them  will  be  different  than  if  she  does  carry  out  her 
treaty  obligations.  Then  there  are  the  inter-Allied  loans,  which 
were  extended  by  the  United  States  to  her  associates  and  by  Great 
Britain  and  France  to  the  Allied  Powers.  According  to  Austen 
Chamberlain,  Great  Britain  has  already  written  of?  50  per  cent  of 
the  advances  that  she  made.  From  all  sides,  with  increasing  pres- 
sure the  suggestion  is  put  forward  that  all  inter-governmental  loans 
be  canceled.  Under  no  conditions  should  the  inter-governmental 
advances  be  counted  twice  in  calculating  cost  to  the  world.  If 
the  debt  is  to  be  paid  it  should  be  included  in  the  cost  of  the  war 
to  the  borrower  but  not  to  the  lender.  If  the  debt  is  canceled 
by  the  lender  or  repudiated  by  the  borrower,  it  should  be  counted 
as  a  cost  of  the  war  to  the  lender.  At  all  events,  until  the  final 
disposition  is  made  of  these  debts,  among  the  Allies,  it  will  be  im- 
possible to  give  an  unconditional  estimate  of  the  cost  of  the  war  to 
each  of  the  powers  involved,  though  of  course  the  world  totals  will 
not  be  affected. 

ii.  The  Direct  Costs  of  the  War 

The  direct  costs  of  the  war  constitute  the  actual  cash  expendi- 
tures incidental  to  its  prosecution.  They  are  definite  in  nature  if 
not  always  ascertainable  in  amount.  To  the  extent  that  the  money 
is  raised  through  loans,  internal  or  external,  or  throup-h  taxes,  the 
cost  may  be  accurately  measured.  But  the  issue  of  fiat  currency 
and  the  inflation  of  credit  give  the  various  governments  a  purchasing 
power  over  goods  and  diminish  the  purchasing  power  of  the  people 
in  a  way  that  makes  it  impossible  to  determine  the  cost  precisely. 
The  total  direct  cost  of  the  war  is  the  sum  of  the  loans  and  taxes. 
Money  raised  by  inflating  the  currency  is  included  in  the  govern- 
ments' treasury  bills  held  by  the  banks  of  issue,  in  some  cases. 

(a)  The  Total  Direct  Cost — 

Several  estimates  have  been  made  of  the  cost  of  the  war,  the 
variation  between  which  is  due  to  differences  as  to  period  covered, 
and  differences  as  to  items  included.  The  Statistics  Branch  of 
the  General  Staff  of  the  United  States  War  Department  figured 
the  direct  cost  ot  the  World  War  to  be  $186,000,000,000.  Edgar 
Crammond  in  Great  Britain  estimated  the  total  direct  cost  of  the 


36  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

war  to  be  about  $210,000,000,000.  E.  L.  Bogart  in  his  very  com- 
prehensive study  estimated  the  total  direct  cost  to  be  $186,333,- 
000,000.  L.  R.  Gottlieb  estimated  that  the  increase  in  gross  in- 
debtedness of  the  principal  belligerents  was  $212,000,000,000,  but 
this  sum  included  about  $29,000,000,000  of  Russian  paper  currency, 
the  deduction  of  which  would  make  the  increase  of  gross  indebted- 
ness $183,000,000,000.  Deducting  advances  among  the  Allies  of 
about  $23,000,000,000,  counted  twice,  the  net  increase  in  the  debt 
of  the  world  would  be  $160,000,000,000.  The  addition  of  $32,- 
000,000,000  in  taxes  would  make  the  total  direct  cost  of  the  war 
$192,000,000,000.  E.  R.  A.  Seligman  reckons  the  total  war  ex- 
penditures to  be  about  $232,000,000,000  and  the  net  war  expenses 
about  $210,000,000,000.  He  ascribes  his  high  result  to  the  fact 
that  he  used  later  figures  than  did  other  writers. 

Assuming  that  the  total  direct  cost  of  the  World  War  is  about 
$200,000,000,000  this  figure  is  ten  times  the  total  foreign  invest- 
ments accumulated  by  Great  Britain  before  the  war,  or  more  than 
five  times  the  foreign  investments  of  the  entire  world.  The  world's 
annual  foreign  trade  before  the  war  was  $40,000,000,000,  which 
is  about  one-fifth  the  cost  of  the  war.  The  world  production  of 
gold  from  the  discovery  of  America  up  to  191 3  aggregates  about 
$15,000,000,000  or  about  one-thirteenth  of  the  cost  of  the  war.  In 
terms  of  American  values,  the  cost  of  the  war  to  the  world  is  ap- 
proximately equal  to  the  total  estimated  wealth  of  the  United 
States,  or  over  ten  times  the  valuation  of  the  railroads  of  the 
United  States,  or  about  400  times  the  annual  value  of  new  build- 
ing construction,  about  50  times  the  value  of  our  foreign  trade 
before  the  war,  and  about  60  times  the  value  of  the  general  stock 
of  gold  in  the  United  States,  on  January  i,  1920. 

(b)   Loans — 

I.  Public  debt  of  belligerents — The  war  was  financed  very 
largely  by  loans. 

A  study  of  this  table  reveals  several  striking  facts.  Before  the 
war  the  largest  public  debt  was  carried  by  France,  with  Russia 
and  Austria- Hungary  following.  After  the  war  the  largest  debt 
was  carried  by  Germany  with  Great  Britain,  France  and  Austria- 
Hungary  following.  The  greatest  war  debt  was  incurred  by  Ger- 
many and  the  next  greatest  by  Great  Britain.  France,  Austria- 
Hungary,  the  United  States  and  Russia  incurred  approximately  the 


PRINCIPLES  AND  PRACTICE   IN  THE   WORLD   WAR 


37 


Total  War  Expenditures 
(In  million  dollars.     Foreign  currency  converted  at  mint  parity) 


Country 

Great  Britain 

Australia 

New  Zealand 

Canada 

South  Africa 

India 

British  Empire 

France 

Russia 

Italy 

Belgium 

Roumania 

Serbia 

United  States 

Entente  Powers .... 

Germany 

Austria-Hungary 

Turkey 

Bulgaria 

Central  Powers 

Total  Gross  Expendi- 
■  tares 

Loans  to  Allies 

Great  Britain 

France 

Germany 

United  States 

Total  Inter-Allied  loans 

Total  net  war  expendi 
tures 


Amount 


Period 


1,461 
36s 

1,545 
243 
584 


32,617 

26,522 

15,636 

1,387 

907 

635 
32,261 


48,616 

24,858 

1,802 

732 


3,085 


156,050 


76,008 


$232,058 


8,467 
1,293 
2,261 
9,102 


21,123 


210,93s 


Aug.  4,  1914,  to  Mar.  31,  1919 

Aug.  4,  1914,  to  Mar.  31,  1919 

Aug.  4,  1914,  to  Mar.  31,  1919 

Aug.  4,  1914,  to  Aug.  31,  1919 

Aug.  4,  1914,  to  Mar.  31,  1919 

Aug.  4,  1914,  to  Mar.  31,  1919 


Aug.  3,  1914,  to  Mar.  31,  1919 
Aug.  I,  1914,  to  Oct.  31,  1917 
May  23,  1915,  to  May  31,  igig 
Aug.  2,  1914,  to  Oct.  31,  1918 
Aug.  27,  1916,  to  Oct.  31,  1918 
July  28,  1914,  to  Oct.  31,  1918 
April   5,  1917,  to  June  30,  1919 


Aug.  I,  1914,  to  Oct.  31,  1919 
July  28,  1914,  to  July  31,  1919 
Nov.  3,  1914,  to  Oct.  31,  1918 
Oct.     4,  1915,  to  Oct.  31,  1918 


same  war  debt.  The  ratio  of  post-war  to  pre-war  debt,  or  the 
relative  growth  of  the  debt,  was  greatest  for  Germany  with  the 
United  States  following  second.  These  figures  indicate  not  merely 
that  a  large  war  debt  was  incurred  but  also  that  the  pre-war  debt 
had  been  reduced  to  very  small  proportions.  For  instance,  the 
French  public  debt  before  the  war  was  about  five  times  as  large 


38 


INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 


as  that  of  the  United  States  or  Germany,  and  the  British  debt 
about  three  times  as  large.  The  Japanese  debt  remained  practically 
constant.  The  victors  spent  almost  twice  as  much  as  the  van- 
quished— a  striking  commentary  on  the  cost  of  unpreparedness. 
The  debt  of  the  victors  grew  sixfold,  whereas  that  of  the  van- 
quished multiplied  about  sixteenfold.  However,  such  a  statistical 
generalization  is  misleading,  as  the  problem  of  paying  the  war  debt 
affects  each  country  individually,  regardless  of  its  Allies,  and 
there  can  be  no  joint  action  of  groups  of  countries  such  as  will  carry 
into  effect  the  implications  of  a  statistical  averaging  of  the  debt. 
The  weak  countries  overburdened  with  debt  do  not  find  their  debt 
lightened  merely  because  they  were  the  Allies  of  countries  which  by 
reason  of  wiser  financing  or  more  wealth  incurred  a  relatively 
smaller  debt.  ^ 

PtTBLic  Debts  of  Belligerents 
(in  million  dollars) 


Country 

Before  the  War 

After  the  War 

War  debt 

Ratio  of 
post-war 

Date 

Amount 

Date 

Amount 

to  pre-war 
debts 

Great  Britain 

Aug.  4, 1914 
Aug.  4,  1914 
Aug.  4,  1914 
Aug.  4,  1914 
Aug.  4, 1914 

July,      1914 
July,      1914 
May,      1915 
Aug.  2,  1914 
Aug.,      1916 
July,      19 14 
July,      1914 
April  s,  1917 

Aug.  I,  1914 
Aug.  I,  1914 
Nov.,     1914 
Oct.   4, 1915 

3.165 
472 
332 
487 
614 

Mar.  31, 1919 
Jan.   31, 1919 
Aug.  31.  1919 
Mar.  31,  1919 
Mar.  31,  1919 

37,221* 

1.634 

1.684 

828 

846 

34,056 

1,162 

1.352 

341 

232 

11.7 
3  5 
51 
1.7 
1.3 

New  Zealand 

South  Africa 

British  Empire . . . 

S.070 

6.291 

4.623 

2,621 

722 

292 

271 

1,247 

1,190 

Dec.  31, 1918 
Sept.    1,  1917 
May  31,  1919 
April  30,  1919 
Oct.    31,  1918 
Oct.    31,  1918 
July  31,  1918 
June  30,  1919 

42,213 
32,322 

25,383t 

15.009 

1,888 

1,020 

730 

1.26s 

24.232 

37.143 

26,031 

20,760 

12,388 

1,166 

728 

459 

18 

23.042 

8.3 

Russia 

S  S 

Italy 

Roumania 

3.5 

2.7 
1 .0 

United  States 

20.4 

22,327 

1,126 
3,726 

485 

219 

144,062 

48.552 

28.584 

2.002 

974 

121,735 

47,426 

24,858 

1,517 

755 

6.4 

Germany 

Oct.   30,  1919 
July  31.  1919 
Oct.,        1918 
Oct.  31,  1918 

42.3 
7.7 
4.1 

Austria-Hungary .  . . 

Central  Powers. . . 

S.556 

80,112 

74.556 

15  8 

Grand  Total 

27,883 

224,174 

196,291 

8.0 

*  Countintr  on  repayment  of  one-half  of  the  loans  to  the  .\lHes.  or  $3,970,000,000. 
t  The  additional  debt  contracted  by  the  Bolshevist  Government  is  not  included. 

2.  Debt  charges — Several  important  facts  stand  out.  The 
annual  debt  charges  for  nearly  all  of  the  belligerents  and  for  each 
group  of  belligerents  increased  more  rapidly  than  did  the  debt. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR 


39 


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40  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  increase  was  due  to  the  higher  interest  rates  borne  by  war 
loans  than  by  pre-war  loans.  In  other  words,  the  percentage  of 
charges  on  the  debt  to  the  debt  itself  was  greater  after  the  war 
than  before  the  war.  Both  before  and  after  the  war  the  percentage 
of  the  annual  debt  charge  of  the  Central  Powers  was  greater 
than  that  of  the  Allied  Powers.  The  growth  of  the  debt  was 
about  6.4  times  for  the  Allies  and  about  11. 1  times  for  the  Central 
Powers.  The  growth  of  the  annual  debt  charges  was  about  7.1 
times  for  the  Allies  and  13.5  times  for  the  Central  Powers.  Before 
the  war  the  United  States  had  the  lowest  percentage  of  annual 
charges  on  the  debt  and  Turkey  the  highest  percentage,  although 
Bulgaria,  Greece,  Russia,  and  Japan,  paid  4  per  cent  or  more 
annually  on  their  outstanding  debts.  As  a  result  of  the  war  there 
was  a  general  increase  in  the  percentage.  The  annual  debt  charges 
of  all  the  powers  enumerated  was  about  $1,000,000,000  before 
the  war,  and  about  $9,300,000,000  after  the  war.  In  comparison 
with  the  total  pre-war  annual  debt  charges  of  all  the  powers 
enumerated,  the  annual  debt  charge  of  Germany  alone  after  the 
war  was  twice  as  great,  that  of  France  almost  twice  as  great,  that 
of  Britain  almost  1.5  times  as  great,  and  that  of  the  United 
States  almost  as  great.  Comparing  the  annual  charges  before  the 
war  and  after  the  war  by  countries,  we  find  that  the  ratio  of 
the  increase  was  52  times  for  Germany,  38  times  for  the  United 
States,  12  times  for  Great  Britain,  8  times  for  France,  and  6 
times  for  Italy. 

3.  Per  CAPITA  DEBT — Of  the  major  belligerents,  the  United 
States  had  the  lowest  per  capita  debt  before  the  war,  and  Germany 
was  next.  Great  Britain  had  a  lower  per  capita  debt  than  Italy, 
and  France  had  the  highest  figure  on  the  list,  with  the  exception 
of  New  Zealand,  whose  debt  probably  include  liens  on  public 
government-owned  industrial  enterprises.  The  per  capita  debt  of 
France  before  the  war  was  about  15  times  as  great  as  that  of  the 
United  States,  about  10  times  that  of  Germany,  and  more  than 
twice  that  of  Great  Britain,  and  of  Italy.  Among  the  major 
powers  there  is  a  fairly  close  correspondence  between  large  per 
capita  debts  and  high  rates  of  interest,  an  important  consideration 
affecting  public  credit  and  financial  preparedness  for  war.  Before 
the  war  the  average  debt  per  capita  among  the  Allied  Powers  was 
but  slightly  greater  than  among  the  Central  Powers.     Combined, 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  4 1 

they  averaged  about  $45  per  capita,  though  this  figure  represents 
the  mean  between  wide  variants.  It  has  significance  only  in  con- 
nection with  the  close  financial  cooperation,  which  existed  during 
the  war. 

The  per  capita  debt  after  the  war  was  greater  among  the 
Central  Powers  than  among  the  Allies,  the  ratio  being  1.6  to  I. 
The  per  capita  debt  among  the  major  belligerents  was  highest  for 
Great  Britain,  with  France,  Germany,  Austria,  Hungary,  Italy, 
and  the  United  States  following  in  order.  The  per  capita  debt 
of  the  United  States  after  the  war  was  about  30  per  cent  of  that 
of  Great  Britain,  and  about  33  per  cent  of  that  of  France.  It 
is  interesting  to  note  that  in  spite  of  the  fact  that  Great  Britain 
had  the  highest  debt  per  capita,  the  debt  charges  per  capita  were 
highest  for  France.  The  reason  is  obvious.  France  was  unable 
to  borrow  at  favorable  rates  because  her  pre-war  debt  was  very 
large  and  because  her  war-time  taxation  was  ineffective.  The  debt 
charge  per  capita  of  Germany  was  second  highest  and  that  of 
Great  Britain  third  in  the  list.  Japan  had  the  lowest  figure.  The 
debt  charges  per  capita  among  the  Central  Powers  was  1.9  times  as 
great  as  among  the  Allied  Powers. 

4,  Debt  and  national  wealth;  debt  charges  and 
NATIONAL  INCOME — Bearing  in  mind  the  sources  of  error  in  the 
estimates  of  national  wealth  and  of  national  income,  it  is  probably 
true  that  the  extent  of  error  is  not  so  great  as  to  make  meaningless 
the  relation  between  national  wealth  and  national  debt,  or  national 
income  and  annual  debt  charges.  The  national  wealth  and  national 
income  before  the  war  are  comparable  with  the  national  debt  and 
annual  debt  charges  before  the  war,  but  not  with  the  post-war 
figures,  which  are  in  terms  of  inflated  monetary  standards.  There- 
fore the  interpretation  of  the  table  showing  the  financial  standing 
of  the  principal  belligerents  must  be  limited.  Before  the  war  the 
national  wealth  of  the  countries  known  subsequently  as  the  Allied 
Powers,  was  3.5  times  as  great  as  that  of  the  Central  Powers.  The 
pre-war  national  income  of  the  Allied  Powers  was  4.3  times  that  of 
the  Central  Powers.  The  Allied  Powers  enjoyed  an  income  of  14.9 
per  cent  on  their  national  wealth  and  the  Central  Powers  an 
income  of  11.9  per  cent.  Before  the  war  both  groups  of  powers 
had  mortgaged  their  national  wealth  to  approximately  the  same 
small  extent,  and  the  debt  charges  of  the  two  groups  constituted 


42 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


a  very  small  percentage  of  the  national  income.     However,  within 
each  of  the  groups  there  was  a  very  wide  range  of  differences. 

Per  Capita  Debt  and  Ajstnual  Debt  Ch.a.rges  of  Principal  Belligerents 


Country 


Popula- 
tion 
(thou- 
sands) 


Before  the  War 


Debt 

per 

capita 


Debt 
charges 

per 
capita 


After  the  War 


Debt 

per 

capita 


Debt 

charges 

per 
capita 


United  States 

Great  Britain 

Canada 

Australia 

New  Zealand 

France 

Italy 

Japan 

Russia 

Belgium 

Greece  

Total  Allied  Powers. 

Germany 

Austria 

Hungary 

Turkey 

Bulgaria 

Total      Central 
Powers 

Grand  Total 


106,653 

46,089 

8,361 

4,971 

1,162 

39,700 

36,717 

57,998 

182,183 

7,658 

4,950 


S  11.33 
75  03 

40.19 

18.71 

383  82 

166. 20 

82.55 
21.74 

27-95 
94.28 
37.98 


$0.22 
2.58 

1-55 

0.60 

II .  19 

6.35 
2.81 

0-93 
1.20 
3.26 
1.62 


$249.38 
817.04 

189.45 
325  69 
^31.67 
768.11 
408.78 
22. 14 
138.30 
246.67 
105 ■ 25 


$8.38 
30.83 
13.75 

10.06 

18.93 

48.61 
15-71 

0.90 
4.20 

II.  lO 

3- 64 


496,442 

67,812 
30,958 
21,410 
21,274 
5,518 


45.19 

17.18 

84.99 
7482 

31-35 
30-99 


1.67 

0.62 
3.26 
2.48 
2.12 
1-45 


287.63 

589-97 
551-42 
416. II 
94.11 
209.86 


11-95 

32.46 
20.09 
16.  21 
4.14 
19-75 


146,972 
643,414 


42.43 
44  56 


1.69 
1.68 


470.48 
329.40 


22.91 
14.45 


The  United  States'  pre-war  national  wealth  was  about  45  per 
cent  that  of  the  total  for  the  Allied  Powers,  and  1.6  times  that 
of  the  Central  Powers.  The  other  countries,  in  the  order  of 
national  wealth,  were  as  follows:  Germany,  Great  Britain,  Russia, 
France,  Austria,  Italy.  The  pre-war  national  income  of  the  United 
States  constituted  54  per  cent  of  that  of  the  Allied  Powers,  and 
2.3  times  that  of  the  Central  Powers. 

The  ratios  of  income  to  national  wealth  show  wide  variations 
which  may  indicate  either  the  greater  profitableness  of  the  invest- 
ments of  some  countries  or  the  extent  of  error.  Why  industrialized 
Belgium  and  agricultural  Hungary  should  show  the  same  figures, 


PRINCIPLES    AND   PRACTICE   IN   THE    WORLD    WAR 


43 


or  why  the  United  States,  with  her  abundant  resources  and  rela- 
tively sparse  population,  and  Italy,  with  her  scant  resources  and 
abundant  population,  should  show  almost  the  same  returns,  are 
questions  that  emphasize  the  limited  utility  of  the  figures. 

Debt  and  National  Wealth:   Debt  Charges  and  National  Income 
(in  million  dollars) 


Country 


Pre-war 

national 
wealth 


Pre-war 
national 
income 


Ratio 

of 
income 

to 
wealth 


Before  Entering  War 


Debt  as 

percentage 

of 

national 

wealth 


Debt 

charges  as 
percentage 
of  national 


At  End  of  the  War 


Debt  as 

percentage 

of 

national 

wealth 


Debt 

charges  as 

percentage 

of  national 

income 


United  States 

Great  Britain 

France 

Italy 

Japan 

Russia* 

Belgium 

Total  iMlied  Powers' 

Germany 

Austria 

Hungary 

Turkey 

Bulgaria 

Total  CentralPower: 

Grand   total 


204,400 
69,600 
58,500 
22,800 
11,700 
60,000 
15.000 


35,300 
11.000 
6,000 
4,000 
1,700 
6,500 
1,300 


17-3 
16. 1 
10.3 
17.6 
U-5 
10.8 
8.7 


442,000 

80,500 
23,500 
16,500 
4,000 
4,000 


65,800 

10,500 

2,400 

1,400 

500 

500 


14.9 


128,500 
570,500 


15,300 
81,100 


II. 9 

14.2 


0.07 
1.08 
4.20 
2.58 
3.18 
3-35 
1.92 


13  01 
54  ro 
52.13 
65.83 
10.97 
90.67 
12.59 


2.53 
12.92 
32.17 
14.43 

3.0s 
11.78 

6.54 


1. 21 


3.79 
9.00 
1 .60 


37.86 

49.70 
72.64 
53.99 
50.05 
28.95 


1.63 
1.29 


53.81 

41.45 


.8.70 

20.96 

25.92 
2478 
17.60 
21.80 

22.01 

II  .21 


*  Eliminating  the  Bolshevist  currency,  equivalent  to  $28,966,000,000,  the  revised  percent- 
age of  debt  to  national  wealth  would  be  for  Russia  42.30,  for  the  AlUed  Powers  32.30,  for  all 
belligerents  37.15  per  cent. 


The  percentage  of  pre-war  debt  to  national  wealth  was  lowest 
for  the  United  States  and  second  lowest  for  Germany.  Turkey 
had  the  highest  percentage,  and  the  other  countries  stood  in  the 
following  order:  Italy,  France,  Austria,  Japan,  Hungary,  and 
Russia.  The  accuracy  of  these  figures  in  general  is  indicated  by 
the  fact  that  the  percentages  of  debt  to  national  wealth  for  the 
total  Allied  Powers,  for  the  total  Central  Powers,  and  for  the 
grand  total  of  all  the  countries  listed,  bear  much  the  same  relation 
to  each  other  as  do  the  figures  for  the  pre-war  per  capita  debt  of 
these  groups  of  nations.  The  post-war  figures  for  the  percentage 
of  debt  to  national  wealth  for  the  two  great  groups  of  powers 
ako  tally  approximately  with  the  per  capita  debt  at  the  same  date. 


44 


INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 


That  is,  the  relative  losses  of  the  two  groups  of  powers  as  Indicated 
by  these  tables  are  consistent.  However,  a  serious  error  is  undoubt- 
edly involved  in  a  comparison  of  the  post-war  national  debt  and 
the  pre-war  national  wealth.  It  is  absurd  to  think  that  the  leading 
countries  of  the  world  have  on  the  average  lost  over  40  per  cent 
of  their  national  wealth  as  a  result  of  the  war  or  that  individual 
countries,  like  Italy,  and  Great  Britain,  have  lost  over  50  per 
cent.  The  source  of  the  error  undoubtedly  is  the  fact  that  pre- 
war national  wealth  was  estimated  in  terms  of  stable  currency 
standards  and  post-war  national  debt  in  terms  of  inflated  values. 

5.  Inter-Allied  loans — Both  on  the  origin  of  the  national 
debt  and  the  after-war  problem  of  liquidating  them,  the  question 
of  inter-Allied  loans  has  a  most  vital  bearing.  Up  to  the  early 
part  of  19 19  the  financially  strong  countries  had  advanced  about 
$22,000,000,000  to  the  weaker  members  of  their  groups.  The 
total  foreign  debt  of  Great  Britain,  France,  and  Italy  was  as 
follows :  ^^ 


Country 

Date 

Approximate  amount 
(in  millions) 

Great  Britain 

Mar.  31,  1919 
Mar.  31,  1919 
May  30,  1919 

$6570 

France 

5211 

Italy 

3669 

These  governments  had  in  turn  loaned  to  other  governments 
the  following  amounts: 


Country 

Date 

Approximate  amount 

(in  millions) 

United  States 

April    I,  1920 
Mar.  31,  1919 
May,        1919 
Mar.  30,  1919 
Sept.    I,  1918 

$9660 

Great  Britain 

869s 

France 

2413 

Germany         

1794 

Japan            

574 

'For  details  see  chapter  on  Inter-Allied  Debts. 


PRINCIPLES   AND  PRACTICE   IN  THE  WORLD  WAR 


45 


Advances  by  the  United  States,  Great  Britain,  and  Germany, 
were  as  follows: 

Chief  Advances  by  Belligerents 
(in  million  dollars) 


By  United  States  to — 

Great  Britain 4316 

France 3048 

Italy 1619 

Belgium 343 

Russia 187 

Greece 48 

Czecho-Slovakia . . .  55 

Roumania 25 

Serbia 27 

Cuba 10 

Liberia 5 


By  Great  Britain  to — 

France 170 

Italy 2065 

Russia 2840 

Belgium 435 

Serbia 90 

Other  allies 240 

Dominions 853 


By  Germany  to — 

Austria   and   Hun- 
gary   914 

Bulgaria 510 

Turkey 370 


The  repayment  of  inter-Allied  indebtedness  depends  upon  the 
relative  inflation  in  the  borrowing  and  lending  countries,  relative 
taxation  and  the  rapidity  of  liquidation  after  the  war,  the  repara- 
tion payments,  and  the  financial  clauses  of  the  treaty. 

In  the  origin  of  inter-Allied  indebtedness  the  considerations  were, 
the  need  for  foreign  goods  to  prosecute  the  war,  the  common  aim 
and  therefore  mutual  support  in  achieving  victorj',  and  the  extent 
of  the  cost  to  the  borrowing  and  lending  belligerents.  What  the 
ultimate  disposition  of  these  debts  is  to  be  is  difllicult  now  to  say. 
After  the  Napoleonic  Wars,  Britain  canceled  part  of  the  debts  of 
her  allies  to  her.  The  cost  of  policing  Cuba  during  the  first 
decade  of  the  twentieth  century  Is  an  unpaid  obligation  of  Cuba 
to  the  United  States,  England  has  already  written  ofi  50  per 
cent  of  Russia's  debt  to  her.  On  the  other  hand,  France  is  insist- 
ing that  Russia  repay  to  the  last  centime  the  loans  that  France 
extended  to  her.  The  disposition  of  the  inter-governmental  loans 
depends  upon  many  factors  which  will  become  clearer  within  the 
next  few  years. 

(c)    Taxes — 

The  relative  amount  of  money  raised  by  taxation  during  the 
war  is  of  great  significance,  because  it  afifords  an  opportunity  to 
verify  the  opposed  theories  of  war  finance  advocated  by  economists. 
The  amount  of  money  which  the  belligerents,  except  the  United 


46 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


States  and  Great  Britain,  raised  by  taxation  for  the  pajment  of 
war  expenses  was  very  slight.  The  after-war  condition  of  the 
finances  of  the  belligerents  vindicates  the  policy  of  very  heavy  war 
taxation  and  shows  the  financial  peril  v.'hich  must  result  from 
financing  chiefly  by  loans. 

1.  Ratio  of  taxes  to  expenditure — The  ratio  of  total  taxes 
to  total  expenditure  was  highest  in  the  United  States,  followed  in 
order  by  Great  Britain,  France,  Italy,  and  Germany.  If  loans  to 
the  Allies  are  excluded  as  expenditures,  the  United  States  raised 
36  per  cent  of  the  total  expenditures  by  taxes.  If,  however,  we 
deduct  from  the  total  taxes  and  total  expenditures  the  amounts 
estimated  for  normal  peace  time  the  position  of  France  would  be 
last,  and  the  relative  position  of  the  other  countries  would  remain 
unchanged.  France  raised  about  i  per  cent  of  her  war  expenditures 
by  war  taxes. 

2.  Total  taxes  and  war  taxes  per  capita  per  annum — 
During  the  period  of  the  war  the  total  amount  of  taxes  raised 
was  largest  in  Great  Britain,  the  other  countries  ranging  in  the 
following  order:  United  States,  Germany,  France,  and  Italy. 
However,  deducting  the  equivalent  of  peace-time  taxes  collected 
during  the  war,  the  surplus  of  war  taxes  proper  were  least  in  the 
case  of   France. 

The  per  capita  war  taxes  were  highest  in  Great  Britain  and 
lowest  in  France.  The  war  taxes  per  capita  per  annum  were 
also  highest  in  Great  Britain  and  lowest  in  France. 

Taxes  Per  Capita  Per  .\nnum  '' 


Country 

Period 
covered 
seep.  47 

yrs.  mos. 

Popula- 
tion 
(thou- 
sands) 

Total 

taxes 

(millions) 

Taxes 

per 

capita 

Taxes 

per 
capita 

per 
annum 

Total 

war 

taxes 

(millions) 

War 

taxes 

per 

capita 

War 
tajces 

per 
capita 

per 
annum 

United  States 

Great  Britain.  .  . . 
France 

2    3 
4    8 
4     S 
4  11 
4     S 

106,653 
46,089 
39.700 
36,717 
67,812 

$8,400 

11.439 

3.998 

2,403 

4,046 

$78.76 

248.19 

100.70 

6S.4S 

59-66 

$35  00 
53.18 
22.79 
13-31 
13.51 

I6900 

7730 

21 

1059 

1713 

$64 . 70 

167.72 

O.S3 

28.84 

25.26 

$28.75 

35-94 

0.12 

Italy 

587 

Germany 

5-72 

"The  term  war  taxes   as   used    in   this  table   refers  to   the   surplus 
raised  over  the  equivalent  taxes  of  the  last  peace  year. 


PRINCIPLES   AND   PRACTICE    IN    THE    WORLD   WAR 


47 


Summary  of  Expenditures  and  Receipts  from  Taxation   During  the 

War 

(in  million  dollars) 


Country 

Period 
covered 

Total 
revenue 

Total 
expendi- 
ture 

Loans 

to 
co-bel- 
ligerents 

Peace 
taxes 

during 
war 

period 

Peace 
expendi- 
tures 
during 
war 
period 

United  States.. 
Great  Britain .  . 

France 

Italy 

April    6,1917 
June  30, 1919 
Aug.     1, 1914 
Mar.  31, 1919 
Aug.    1, 1914 
Dec.  31,1918 
Aug.    1, 1914 
June  30, 1919 
Aug.     1, 1914 
Dec.  31, 1918 

8,400 
11,439 
3,998 
2,403 
4,046 

32,428 

46,385 
25,996 
17,595 
36,79s 

9102 

8464 
2413 

2261 

1500 
3709 
3977 
1344 
2333 

1641 
4484 

4319 
2532 

Germany 

2670 

Country 


War 
taxes  " 


War 

expendi- 
tures * 


Ratio  of  Taxes  to  Expenditures 


Total 


per  cent 


Total 
exclud- 
ing 
loans 

to 
allies 

per  cent 


War  Taxes  to  War 
Expenditures 


Total 
per  cent 


Exclud- 
ing loans 
allies. 

per  cent 


United  States 
Great  Britain 

France 

Italy 

Germany .... 


6900 

7730 

21 

1059 
1713 


30,787 
41,901 
21,677 
15,063 
34,125 


36.0 
30.1 
17.0 

13 -3 
II. 7 


22  4 

18. 5 

i.o 

7.0 

5-0 


31-4 

23.1 

I .  I 

7.0 

5-4 


*The  terms  war  taxes  and  war  expenditure  as  used  in  this  table 
mean  the  surplus  over  peace  figures.  The  war  figures  are  obtained  by 
deducting  from  the  total  figures  the  figures  of  the  last  peace  year  multi- 
plied by  the  number  of  years  of  the  war  period. 


The  column  "war  taxes  per  capita  per  annum"  indicates  the 
fiscal  effort  of  the  five  principal  belligerents.  It  shows  strikingly 
the  failure  of  Germany,  Italy,  and  particularly  France,  to  increase 
revenue  from  taxation  during  the  war.  The  relatively  sound 
position  of  both  the  United  States  and  Great  Britain  after  the 


48  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

war  Is  due  to  the  fiscal  policy  which  is  reflected  in  the  high  war 
taxes  per  capita  per  annum  levied  in  these  countries. 

3.  Sources  of  revenue  and  relative  increases  in  taxes. 

a.  Direct  taxes  to  total  taxes — Before  the  war  the  ratio  of 
direct  taxes  to  total  taxes  was  highest  in  Italy.  Her  leading  allies 
ranked  in  the  following  order:  Great  Britain,  France,  and  the 
United  States.  Other  sources  of  revenue  were  customs  duties 
and  other  indirect  taxes.  As  a  result  of  the  development  of  the 
graded  income  tax  and  the  excess-profits  tax,  the  ratio  of  direct 
taxes  to  total  taxes  during  the  war  rose  to  highest  levels  in  Great 
Britain,  followed  by  the  United  States,  Italy,  and  France.  In 
the  last  year  cited  in  the  table  below  the  ratio  was  67  per  cent 
in  the  United  States,  and  74  per  cent  in  Great  Britain,  but  only 
35  per  cent  in  Italy  and  32  per  cent  in  France. 

b.  Relative  increase  in  direct  taxes — If  the  direct  taxes  for  the 
last  year  of  peace  be  taken  as  lOO,  the  relative  increase  in  direct 
taxation  was  greatest  in  the  United  States,  followed  by  Great 
Britain  and  Italy.  France  developed  her  direct  taxation  least  of 
the  four  countries.  In  the  last  year  cited,  as  compared  with  the 
peace-year  standard,  direct  taxes  rose  49  times  in  the  United 
States,  II  times  in  Great  Britain,  3.3  times  in  Italy,  and  only  1.4 
times  in  France. 

c.  Relative  increase  in  total  receipts — Although  France  and 
Italy  have  sources  of  revenue  other  than  taxation,  such  as  revenue 
from  government  monopolies  and  government  enterprises,  the 
revenue  from  these  sources  did  not  increase  much,  and  in  some 
cases  not  at  all.  Therefore,  in  the  relative  increase  in  total  revenue 
the  United  States  again  showed  the  highest  increase  followed  by 
Great  Britain,  Germany,  Italy,  and  France.  In  the  last  year 
cited,  as  compared  with  the  peace-year  standard,  total  receipts 
rose  7.0  times  in  the  United  States,  4.5  times  in  Great  Britain, 
3.5  times  in  Germany,  2.5  times  in  Italy,  and  only  1.3  times  in 
France. 

d.  The  ratio  of  total  taxes  to  expenditures — Before  the  war, 
taxes,  direct  and  indirect,  formed  the  principal  source  of  revenue 
of  the  United  States  and  Great  Britain,  but  France,  Germany  and 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 


49 


Italy  had  other  sources  of  national  income.  Because  of  the  failure 
to  increase  taxes  adequately,  and  because  of  the  steady  or  declining 
amount  of  revenue  from  non-tax  sources,  the  ratio  of  total  taxes 
to  expenditures  declined  to  very  low  figures  in  France,  Germany 
and  Italy. 


Sources  of  Revenue  and  Relative  Increases  in  Taxes  and  Revenue 
During  the  War 


United  States  (fiscal  year  ends  June  30) 

1916 

July     I,  '16- 
April    s,  '17 

April    6,  '17- 
June  30,  '17 

1918 

1919 

Ratio  of  direct  taxes  to  total  taxes .  . . 
Ratio  of  taxes  to  expenditures 

17.2 
100.4 

100 
100 

6.6 
69.4 

27-3 
43-9 

1038 
331 

68.7 
26. s 

3790 
499 

67.1 

24-3 

49  SO 

Great  Britain  (fiscal  year  ends  Mar.  31) 

1914 

Aug.  I,  '14- 
Mar.  31, '15 

1916 

1917 

1918 

1919 

Ratio  of  direct  taxes  to  total  taxes .  .  . 
Ratio  of  total  taxes  to  expenditures. . . 

Relative  direct  taxes  (1914  =  100). . . . 
Relative  total  revenue  u9i4  =  io°)--  ■ 

31  0 
82.7 

100 

TOO 

44-8 
29.2 

193 
130 

45-5 
18.7 

261 
170 

67.8 

23  S 

692 
289 

75-5 
22.7 

91S 

357 

73  9 
30.4 

1 14s 
448 

1913 

Aug.  I,  '14- 
Dec.  31. '14 

1915 

1916 

1917 

1918 

Ratio  of  direct  taxes  to  total  taxes .  .  . 
Ratio  of  total  taxes  to  expenditures. . . 

Relative  direct  taxes  (1913  =  100) .... 
Relative  total  receipts  (1913  =  100).  . 

29.1 
92.1 

100 
100 

35. 6 
17.8 

74 
62 

27.9 
16.0 

75 

79 

24.2 
IS. 2 

79 
96 

26.2 
15.2 

107 
119 

32-3 
ISO 

140 
127 

1914 

191S 

1916 

1917 

1918 

1919 

Ratio  of  direct  taxes  to  total  taxes .  .  . 
Ratio  of  total  taxes  to  expenditures.. . 

Relative  direct  taxes  (1914  =  100) .... 
Relative  total  receipts  (1914  =  100) . . 

41.2 
52.7 

100 
100 

46.0 

2SS 

109 
95 

44.4 
16.6 

134 
119 

4SS 
14-3 

197 
164 

Sir 
12.6 

279 
206 

3S-4 
II. 4 

336 
246 

Germany  (year  ending  Dec.  31) 

19 13 

1914 

191S 

1916 

1917 

Ratio  of  total  taxes  to  expenditures. . . 
Ratio  of  total  revenues  to  expenditures 

Relative  total  receipts  (1913  =100). . . 

81.8 
87.4 

100 

27.8 
27.2 

106 

6.9 
6.7 

78 

7.S 
7-3 

92 

16.2 
IS. 9 

353 

(d)    The  Increase  in  Note  Circulation — 

The  direct  cost  of  the  war  cannot  be  measured  exclusively  in 
terms  of  loans  and  taxes.  Another  factor  is  the  increase  of  note 
circulation,  whether  caused  directly  by  the  state  itself  by  printing 


50  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

fiat  money,  as  in  Russia  or  in  England,  or  whether  it  is  caused 
indirectly  through  the  medium  of  the  official  bank,  as  in  France, 
Germany  and  the  other  countries  of  Europe.  The  increase  in 
the  note  circulation  increases  the  floating  debt  of  the  state,  which 
issues  treasury  bills  in  exchange  for  bank  notes,  and  in  addition 
leads  to  the  depreciation  of  the  currency.  It  is  theft  by  the  state. 
Capitalists  and  holders,  through  bonds,  of  the  accumulated  wealth 
of  the  country  are  subjected  to  a  capital  levy,  as  it  were,  the  rate 
of  which  is  equal  to  the  depreciation  of  the  purchasing  power  of 
money.  The  recipients  of  current  wealth  in  fixed  amounts,  as  in 
wages  and  in  salaries,  are  robbed  by  the  same  process.  An  invisible 
income  tax  is  placed  upon  them,  and  the  rate  is  equal  to  the 
depreciation  of  the  currency.  Who  gets  the  money?  The  owners 
of  war  industries,  the  stockholders  or  proprietors,  retain  the  untaxed 
portion  of  profits,  which  is  created  by  the  insistent  war-time  demand 
for  commodities.  The  nation  as  a  whole  is  neither  richer  nor 
poorer  as  a  result  of  the  increase  of  note  circulation,  just  as  in  the 
case  of  an  increase  in  domestic  debt.  However,  in  both  cases,  the 
owners  of  war  industries  are  enriched  at  the  expense  of  the  wage- 
earning,  salaried,  and  bondholding  classes. 

The  note  circulation  of  the  principal  belligerents  increased  all 
the  way  from  3.5  times  in  the  case  of  Japan  to  47.0  times  in  the 
case  of  Russia  during  the  war.  Before  the  war,  the  per  capita 
'note  circulation  of  the  various  countries  ran  in  the  following 
order:  France,  Belgium,  Italy,  Greece,  Austria-Hungary, 
Germany,  United  States,  Bulgaria,  Great  Britain,  Russia  and 
Japan.  After  the  war,  the  series  ran:  Russia,  France,  Austria- 
Hungan,',  Germany,  Belgium,  Bulgaria,  Italy,  Greece,  Great 
Britain,  Turkey,  United  States,  Japan.  The  rate  of  increase  was 
greatest  for  Turkey,  followed  by  Russia,  Austria-Hungary,  Ger- 
many, Bulgaria,  Great  Britain,  Italy,  Greece,  France,  United 
States,  Belgium  and  Japan. 

Such  conclusions  as  may  be  drawn  from  these  figures  should 
take  into  account  the  financial  habits  of  the  people,  the  use  of 
metallic  or  paper  currency  before  the  war,  and  the  use  of  checks 
rather  than  either  kind  of  currency. 

This  table  covers  the  absolute  increase  in  paper  money  as  a 
factor  in  the  direct  cost  of  the  war.  It  does  not  deal  with  the 
ratio  of  metal  to  paper,  which  will  be  treated  in  the  section  on 
currency  and  credit. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR 


51 


Note  Circulation  of  Principal  Belligerents 
(in  million  dollars) 


Country 


Before  Entering  War 


Date 


Note  circulation 


Total 


Dollars 

per 
capita 


At  a  Recent  Date 


Date 


Note  circulation 


Total 


Dollars 

per 
capita 


Ratio 
1919 

to 
1914 


Allied  Powers: 

United  States. . 
Great  Britain .  . 

France 

Italy 

Japan 

Russia 

Belgium 

Greece 


July  1, 1914 
July  29, 1914 
July  30, 1914 
July  31, 1914 
Aug.  31, 1914 
Aug.  4, 1914 
Mar.  19,  19x4 
July  31, 1914 


Total 

Central  Power.s: 


Germany 

Austria-Hungary , 

Turkey 

Bulgaria 


July  23, 1914 
July  23, 1914 
July,  1914 
Sept.,       1913 


Total 

Grand  total. 


71s 
223 
1290 
S18 
163 
842 
186 
46 


6.70 

4.84 

32.49 

14.  II 

2.81 

4.62 

24.29 

9.29 


3983 


538 

432 

9 

36 


8.26 


7.93 
8.25 
0.42 
6.52 


Oct.  I,  1919 

Oct.  IS,  1919 

Oct.  16, 1919 

July  20, 1919 

Sept.  6,  1919 

Oct.  I,  1919 

Oct.  9, 1919 

Aug.  27, 1919 


Sept.  IS,  1919 
Sept.  30,  1919 
April,  1919 
June  14,  1919 


3.323 

2.333 

7,102 

2,964 

567 

39.762 

906 

258 


33  03 

50.62 

178.89 

80.73 

9  78 

2IS.2S 

118. 31 

S2.I2 


57.415 


10,066 

9.294 

704 

475 


115.65 


148.44 
177-47 
33  09 
86.10 


18.6s 
21.56 
78.22 
1320 


6.91 
7-95 


20,539 
77,954 


139-75 
121 .  16 


20.4 
15-6 


iii.  Indirect   Costs   of  the   War 

The  cost  of  the  war  cannot  be  reduced  to  terms  of  bonds, 
taxes  and  increase  in  the  note  circulation.  Of  the  intangible 
items,  no  appraisal  can  be  made.  However,  the  economic  items 
of  cost  would  include  the  destruction  of  the  accumulated  wealth 
of  the  past,  and  the  loss  of  current  production.  The  indirect  costs 
have  been  estimated  ^^  as  equivalent  to  the  direct  costs.  In  other 
words,  the  total  direct  and  indirect  cost  of  the  war  would  be 
about  $370,000,000,000.  Of  course,  this  would  rule  out  the  mere 
transfer  of  territory,  property,  or  reparation  paj^ments,  which  con- 
stitute a  national  loss  but  not  a  world  loss. 


(a)   Loss  of  Life — 

The  loss  of  life  in  the  World  War  is  estimated  to  be  12,991,000. 
This  figure   includes  the   known   dead   and   an   estimated   50  per 


**  Edgar   Crammond.     The   Cost  of  the  War. 
Statistical   Society,  May,   1915,  p.  398. 


Journal  of  the  Royal 


52 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


cent  of  those  listed  as  prisoners  or  missing. 
countries  is  given  as  follows  by  Bogart: 


The  distribution  by 


Casualties  of  the  Worlx)  War 
(in  thousands) 


Country 


Known 
dead 


Seriously 
wounded 


Otherwise 
wounded 


Prisoners 
or  missing 


United  States 

Great  Britain 

France 

Russia 

Italy 

Belgium 

Serbia 

Roumania 

Greece 

Portugal 

Japan 

Total  Allied  countries 

Germany 

Austria-Hungary 

Turkey 

Bulgaria 

Total  Central  Powers 

Grand  total 


107' 

807 

1428 

2758 

507 

267 

707 

339 

IS 

4 


43 

618 

700 

1000 

500 

40 
322 
200 

10 


148 

1,441 

2.344 

3.950 

462 

100 

28 

t 

30 

12 


S 

65 

454 

2500 

1359 

10 

100 

116 

45 


6939 

1611 
911 

437 
loi 


3060 
9999 


3438 

1600 
850 
108 
300 


8,516 

2,183 

2,150 
300 
852 


4654 

773 

443 

104 

II 


2858 
6296 


5,486 
14,002 


1330 
5984 


These  figures  agree  substantially  vFith  those  of  the  French  War  Office. 
Economiste  Franqaise,  January  4,  1919,  p.  9. 

*  Includes  deaths  in  camps  in  United  States  and  abroad.  Actual 
casualties  were  about  58,000.     Bogart,  idem. 

t  Included  in  preceding  column. 

The  loss  of  life  during  the  Napoleonic  Wars  from  1792  to 
181 5  was  about  2,000,000;  during  the  American  Civil  War,  about 
700,000;  and  during  the  Balkan  War,  about  500,000.  The  total 
loss  of  life  in  wars  of  the  nineteenth  century  was  about  4,500,000. 
The  known  dead  of  the  World  War  was  five  times  that  of  the 
Napoleonic  Wars,  w^hich  lasted  23  years,  and  twice  that  of  all  the 
wars  of  the  last  century.  Bogart  translates  the  loss  of  life  into 
monetary  terms,  using  the  estimates  by  several  statisticians  of  the 
value  of  a  human  life.  The  values  range  from  $400  up  to  $10,000 
and  by  using  an  arithmetical  average  of  seven  estimates  the  figure 


PRINCIPLES    AND   PRACTICE    IN    THE    WORLD   WAR  53 

$45,899,000,000,  is  obtained  as  the  capitalized  value  of  the  lives 
lost. 

In  addition  to  the  deaths  resulting  from  military  operations, 
the  decrease  in  births  reduced  the  civilian  population  by  500,000 
in  the  United  Kingdom,  833,000  in  the  uninvaded  district  of 
France,  2,600,000  in  Germany,  and  2,600,000  in  Austria-Hungary. 
To  the  loss  of  life  must  be  added  various  degrees  of  incapacity  on 
account  of  wounds  or  sickness,  directly  ascribable  to  the  war,  as 
trench  fever,  Spanish  influenza,  and  tuberculosis.  Again,  as  a 
result  of  famine  and  hardship,  the  vigor  of  the  populations  was 
reduced. 

(b)   Loss  of  Property — 

The  loss  of  property  is  as  difficult  to  determine  as  the  capi- 
talized value  of  the  loss  of  life.  Estimates  vary,  depending  upon 
the  authority  and  whether  they  were  made  for  the  purpose  of 
increasing  the  indemnity  under  the  treaty  or  of  obtaining  credit 
for  reconstruction.  For  instance,  the  property  losses  in  Belgium 
have  been  figured  to  be  from  $6,750,000,000  to  $8,000,000,000. 
Bogart  accepts  the  figure  $7,000,000,000.  The  official  appraisal 
of  Belgium  wealth,  published  in  1913  by  the  Finance  Minister 
of  Belgium  was  $5,905,000,000.  J.  C.  Stamp  has  revised  this 
figure  upward  and  takes  $7,500,000,000  to  be  a  liberal  estimate. 
On  either  of  these  bases,  the  claims  at  the  peace  table  and  the 
Bogart  figures  are  obviously  too  high.  Keynes  estimates  as  a 
maximum  a  physical  loss  of  $750,000,000  and  levies  and  requisi- 
tions of  $500,000,000.^^ 

The  estimates  of  property  loss  in  France  submitted  at  the 
Peace  Conference  were  similarly  overrated.  M.  Loucheur,  Minister 
of  Industrial  Reconstruction,  estimated  that  the  cost  of  rehabilita- 
tion of  the  devastated  areas  would  be  about  $15,000,000,000. 
M.  Dubois,  of  the  Budget  Commission  of  the  Chamber  of  Deputies, 
set  $13,000,000,000  as  a  minimum,  excluding  war  levies,  losses 
at  sea,  loss  of  public  monuments  and  roads.  M.  Klotz,  Minister 
of  Finance,  estimated  the  total  French  claims  for  damage  to 
property  at  $26,800,000,000.  On  the  other  hand,  Rene  Pupin 
estimates  the  property  losses  of  the  invaded  regions  at  $2,000,000,- 
000  to  $3,000,000,000.    J.  M.  Keynes,  representative  of  the  British 

**  Keynes,   J.   M.,   Economic   Consequences  of  the  Peace.     1920.     Pp. 
124,  127. 


54  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Treasury  at  the  Peace  Conference,  independently  estimated  the  loss 
to  be  $2,500,000,000,  about  one-sixth  of  M.  Loucheur's  figures 
and  less  than  one-tenth  of  M.  Klotz'  figures.^^ 

Bogart  summarizes  the  total  property  loss  at  $29,960,000,000, 
which  probably  is  50  to  75  per  cent  too  high  an  estimate. 

The  total  loss  of  tonnage,  according  to  Bogart,  was  15,398,000 
gross  tons,  of  a  value  of  about  $3,000,000,000.  (Lloyd's  Register 
of  Shipping  gives  figures  as  14,224,000  gross  tons.)  At  a  pre- 
war valuation  of  cargo  at  $250  per  ton,  the  total  cargo  loss  would 
be  $3,800,000,000.  Total  losses  at  sea  therefore  would  equal 
$6,800,000,000. 

(c)  War  Relief— 

The  total  collections  for  war  relief  are  not  available.  How- 
ever, Bogart  gives  the  following  figures:  $625,000,000  in  the 
United  States,  about  $92,000,000  in  Canada,  about  $87,000,000 
in  Great  Britain,  and  $69,000,000  in  the  British  Colonies.  The 
total  of  the  known  figures  is  $873,000,000  and  the  probable  total 
for  the  entire  world  is  probably  over  $1,000,000,000. 

(d)  Losses  of  Neutrals — 

As  a  result  of  the  war,  the  neutrals  were  subject  to  immeasur- 
able hardship,  which  cannot  be  reduced  to  monetary  terms. 
Directly,  the  cost  of  the  war  to  them  included  the  expense  of 
mobilization  and  other  outlays  incidental  to  the  war.  According 
to  Bogart,  these  costs  were  as  follows:  Netherlands,  $672,000,000; 
Switzerland,  $250,000,000;  Sweden,  $430,000,000;  Norway, 
$130,000,000;  Denmark,  $90,000,000.  The  total  cost  of  the  war 
to  neutrals,  including  an  estimated  allowance  of  $200,000,000  for 
those  not  mentioned  above,  would  be  about  $1,750,000,000. 

(e)  Loss  of  Current  Wealth — 

This  item  is  practically  impossible  to  determine.  The  diversion 
of  natural  resources  to  war,  the  changes  in  trade  routes,  the  shut- 
ting off  of  sources  of  income,  the  increased  expenditure  of  human 
effort,  and  the  decrease  in  consumption,  cannot  be  estimated. 
Bogart  assumes  that  20,000,000  men  were  withdrawn  from  industry 
for  4^/2  years.  Allowing  an  average  productive  capacity  of  $500 
per  year,  the  total  loss  of  production  would  be  $45,000,000,000. 

"Keynes,  ibid. 


PRINCIPLES    AND   PRACTICE    IN    THE    WORLD   WAR  55 

However,  this  estimate  does  not  take  account  of  the  increase  in 
production  due  to  the  removal  of  the  restrictions  on  output  during 
the  war,  the  replacement  of  men  by  women  in  industry,  and  the 
vastly  greater  production  of  goods  during  the  war  than  either  before 
or  after  the  war. 

(f)  Social  Unrest — 

An  important  element  in  the  cost  of  the  war  is  the  loss  of 
production  following  its  close.  The  productivity  of  mines,  fields 
and  factories  declined  not  only  below  the  war-time  levels  but  even 
below  the  pre-war  levels.  And  the  end  is  not  yet.  The  intangible 
cost  of  the  readjustment  to  some  sort  of  stable  conditions  after 
the  war  is  an  indirect  cost  of  the  war. 

(g)  Total  Indirect  Costs — 

Excluding  the  last  item,  Bogart  summarizes  the  indirect  costs 
as  follows: 


Capitalized  value  of  human  life: 
Soldiers 

(In  millions) 

$33,500 

33,500 

30,000 

6,800 

45,000 

Civilians 

Property  losses: 

Land •                           

Shipping  and  cargo 

Loss  of  production  

War  relief       .        

Loss  to  neutrals 

1,700 

Total  indirect  costs 

151,500 

Except  for  the  three  minor  items,  loss  to  neutrals,  war  relief, 
and  loss  of  shipping  and  cargo,  these  items  are  subject  to  a  possible 
reduction  of  about  50  per  cent. 

(h)   Compensation — 

The  offsets  to  the  direct  and  indirect  costs  of  the  war  are 
both  economic  and  political.  Some  of  the  expenditures  were 
incurred  for  productive  ends,  as  the  building  of  plants,  railroads, 
ports  and  ships,  which  would  have  been  built  in  the  normal  course 
of  development.  Again,  some  of  the  costs  are  apparent  rather 
than  real,  such  as  the  provisioning  of  the  military  and  civilian 
population  by  the  state  instead  of  from  private  funds.    The  average 


56  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

increase  in  the  index  numbers  of  wholesale  prices  during  the  period 
1 91 4-1 8  was  more  than  100  per  cent  over  the  191 3  figures,  so 
that  the  total  cost  of  the  war  would  have  to  be  reduced  by  50 
per  cent  to  obtain  a  pre-war  valuation.  The  ultimate  conversion 
of  the  debt  and  the  reduction  of  the  rate  of  interest  may  reduce 
the  money  cost  considerably. 

In  addition  to  these  offsets,  there  are  positive  economic  gains. 
The  war  stimulated  large-scale  production,  the  use  of  automatic 
machinery,  the  development  of  efficient  methods  of  industrial  organ- 
ization. New  processes  were  developed,  like  the  Haber  method 
of  making  artificial  nitrates.  Some  substitutes  were  developed 
whose  production  may  become  profitable  if  prices  of  the  original 
article  in  use  should  rise.  The  war  thus  developed  potential  re- 
straints on  high  prices  of  some  commodities.  In  commerce,  new 
and  more  efficient  methods  of  international  distribution  of  com- 
modities were  made  practicable  during  the  war  and  may  remain 
permanently  after  the  war. 

In  the  larger  sense,  the  war  must  be  regarded  merely  as  an 
incident  in  the  development  of  the  human  race.  All  our  political 
and  social  gains  in  the  past  have  been  achieved  at  a  price.  Some 
ambitious  sociologists  and  statisticians  have  attempted  to  estimate 
the  money  cost  of  progress  and  to  compute  in  terms  of  lives  the 
cost  of  social  gains  like  those  resulting  from  the  French  Revolution. 
The  per  capita  cost  of  the  Russian  Revolution,  it  is  said,  is  less 
than  that  of  the  French  Revolution.  However,  should  the  League 
of  Nations  be  tested,  the  world  at  large  will  adopt  the  Anglo-Saxon 
method  of  achieving  progress,  by  counting  heads  instead  of  breaking 
them.  When  the  world  at  large  will  be  able  to  compel  social 
change  without  violence,  the  cost  of  progress  in  terms  of  lives  will 
be  greatly  reduced.  If  the  World  War  results  in  an  effective  and 
just  League  of  Nations,  perhaps  the  gigantic  cost  will  be  more 
than  compensated  by  the  infinite  gains  in  the  method  of  social 
development. 


CHAPTER  II 
BRITISH  PUBLIC  FINANCE^ 

A.  Pre-War  Situation  and  Cost  of  the  War 

After  the  Napoleonic  Wars,  the  British  debt  was  reduced  out 
of  the  occasional  annual  surplus  of  budget  revenue  instead  of  by 
payments  into  a  fictitious  annual  sinking  fund.  The  interest  rates 
on  the  outstanding  debt  were  lowered  by  successive  conversions  of 

*  Material  in  this  chapter  is  based  on  the  following  sources: 

Official  sources: 

Finance  accounts  of  the   United  Kingdom.      (Annual   in  Sessional 

papers.) 
Statements    relative   to    the   national    debt.      (Annual    in    Sessional 

papers.) 
Statements  of  revenue  and  expenditures  as  laid  before  the  House 

by  the  Chancellor  of  the  Exchequer  when  opening  the  budget. 

(Annual  in  Sessional  papers.) 
Votes  of  credit.      (Annual  in  Sessional  papers.) 
Reports  of  the  Committee  on  currency  and  foreign  exchanges  after 

the   war.      (Lord    Cunliffe,    Chairman.)      Interim    report,    1918. 

Final   report,   1919.      (This   and   other   special   financial    reports 

may  be  found  in  Sessional  papers.) 
Hansard's  Parliamentary  Debates   (speeches  of  Chancellors  of  the 

Exchequer,  Lloyd   George,   1914-15;    McKenna,   1915-16;   Bonar 

Law,  1917-18;  Austen  Chamberlain,  1919—) 
Report    of   the    Commissioners    of    internal    revenue.      (Annual    in 

Sessional  papers.) 
Report  from  the  Committee  of  Public  Accounts. 
Return  Relating  to  Imperial  Revenue  (Collection  and  Expenditure). 

(Annual  in  Sessional  papers.) 
Account  of  the  Public  Income  and  Expenditure.     (Annual   in  Ses- 
sional papers.) 
National  Debt  and  Assets.     (Annual  in  Sessional  papers.) 
Inland  Revenue.     (Annual  in  Sessional  papers.) 

Semi-official  sources: 

Journal  of  the  Royal  Statistical  Society. 

Economist.      (London.) 

Statist. 

Bankers'  Magazine.     (London.) 

Stock  Exchange  Official  Intelligence. 

Stock  Exchange  Yearbook. 

57 


58  INTERNATIONAL   FINANCE   AND    ITS    REORGANIZATION 

portions  of  the  debt  from  5  per  cent  to  3  5^  per  Tent  in  the  period 
1 822- 1 834,  and  to  3  per  cent  by  1853.  As  a  result  of  the  Crimean 
War,  the  anticipated  reduction  of  interest  rates  to  2^  per  cent 
was  not  accomplished.  In  1875,  the  government  made  provision  for 
definite  sinking  fund  instalments  instead  of  utilizing  chance  budget 
surpluses  to  redeem  the  debt.  Under  this  scheme,  large  reductions 
were  made  in  the  first  decade  in  the  twentieth  century.  To  con- 
vert all  the  3  per  cent  loans,  a  new  stock  was  issued  in  1888  to  yield 
2^  per  cent  until  1903  and  2i/<  per  cent  thereafter  for  twenty 
years. 

The  great  increases  in  debt  were  due  to  wars.  The  Napoleonic 
Wars  added  613  millions  sterling  to  the  debt  and  hardly  59  millions 
were  paid  off  before  the  Crimean  War.  The  latter  added  another 
35  millions  which  was  paid  off  in  the  following  twelve  years  of 
peace.  The  Boer  War  added  163  millions  sterling  to  the  debt  and 
only  90  millions  was  paid  off  at  the  outbreak  of  the  World  War. 
The  great  increase  in  the  recent  years  before  the  war  in  the  civil 
budget,  covering  extensions  of  social  legislation,  interfered  with 
the  rapid  reduction  of  the  debt.  In  spite  of  the  criticism  of 
students  of  public  finance  and  of  statesmen  of  Great  Britain,  her 
debt  was  handled  with  greater  skill  than  the  debts  of  the  Con- 


For  collateral  reading: 

Bogart,  E.  L.,  Direct  and  Indirect  Costs  of  the  World  War.  New 
York:  Oxford  University  Press,  1919. 

Kirkaldy,  A.  W.,  Labor,  Finance  and  the  War.  London:  Sir  Isaac 
Pitman  and   Sons,  Ltd.,   1916. 

Kirkaldy,  A.  W.,  Industry  and  Finance.  London:  Sir  Isaac  Pitman 
and  Sons,  Ltd.,  1917. 

Laughlin,  J.  Laurence,  Credit  of  the  Nations.  New  York:  Charles 
Scribner's  Sons,   1919. 

International  War  Loans  of  the  Belligerent  Countries.  New  York: 
National  City  Company,   1918. 

Seligman,  E.  R.  A.,  The  Cost  of  the  War  and  How  it  Was  Met. 
American  Economic  Review,  ix.  4;  739-770,  December,  1919. 

Gottlieb,  L.  R.,  Indebtedness  of  Principal  Belligerents.  Quarterly 
Journal  of  Economics,  xxxiii,  3:  504-531,  May,  1919. 

Debts,  Revenues  and  Expenditures  and  Note  Circulation  of  the  Prin- 
cipal Belligerents.  Quarterly  Journal  of  Economics,  xxxiv,  i: 
161-205,  November,  1919. 

Les  Finances  d'Apres  Guerre,  Revue  de  Science  et  de  Legislation 
Financieres,  October,  1920;  xviii,  4:  613-713. 

Jeze,  Gaston  wrote  a  series,  of  articles  during  the  war  in  this  maga- 
zine covering  official  data  on  war  finances. 

Snodgrass,  K.  H.,  British  Finance  During  the  War.  Federal  Re- 
serve Bulletin,  May,  1921,  pp.  563-572. 


BRITISH    PUBLIC    FINANCE 


59 


tinental  countries.  In  the  99  years  between  the  end  of  the 
Napoleonic  Wars  and  the  beginning  of  the  World  War,  the  debt 
had  been  reduced  from  861  millions  to  708  millions  sterling,  or  by 
18  per  cent,  and  the  annual  charges  from  32.6  millions  to  24.5 
millions  or  by  35  per  cent. 

An  important  characteristic  of  British  financing  of  the  war  was 
the  high  and  increasing  ratio  of  total  revenue  to  total  expenditure. 
As  the  war  progressed,  an  increasing  portion  of  the  war  burden 
was  borne  by  taxation.  In  the  fiscal  year  1 91 6,  revenue  was  about 
21  per  cent  of  expenditure  and  in  1 919  about  33  per  cent.  The 
following  table  illustrates  these  facts: 

Ratio  of  Revenue  to  Expendituees 
(in  millions  sterling) 


Expenditures 
Amount 

Revenues 

Loans 
Amount 

Fiscal  year 

Amount 

Per  cent  of 
Expenditures 

1912-13 
1914-15 
1915-16 
1916-17 
1917-18 
1918-19 

Total  war  years 

Less  5  normal  years. . 

188.6 
560 

1569 
2198 
2696 
2579 

9592 
943 

188.8 

226 

336 

573 

707 

889 

2731 
944 

100. 1 

44-3 
21.4 
26.1 
26.3 
33-2 

28.4 
100. 1 

20.  7 

80.4 
II9-S 

334 
1233 
1625 
1989 
1690 

6862 

Net  war  total 

1919-20 
1920-21 

8649 

1665 
1 184 

1787 

1339 
1418* 

326 
234* 

*  The    returns   for   1920-21    almost   yielded   the   surplus   of   about   234 
millions  sterling  estimated. 


As  the  war  progressed  Britain  raised  increasing  funds  through 
taxation.  A  vigorous  tax  policy  in  turn  strengthened  British  credit 
during  the  war. 


6o 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


B.  Loans 

A  classification  of  the  forms  of  the  public  debt  of  Great  Britain 
from  1914  to  1919  indicates  several  pronounced  tendencies.  As 
the  war  dragged  on,  loans  from  new  sources  increased  so  that  in 
the  fiscal  year  ending  March  31,  1 919,  about  28  per  cent  of  the 
outstanding  public  debt  was  obtained  from  sources  not  used  before 
the  war.  The  drain  on  the  old  sources  of  public  credit  compelled 
a  shift  to  new  sources.  Furthermore,  in  the  early  stages  of  the  war, 
short-term  loans  constituted  the  chief  reliance  of  the  treasury;  but 
in  the  later  stages  of  the  war  long-term  loans  were  more  extensively 
used.  After  America  entered  into  the  war,  Britain  had  less  need 
to  resort  to  short-term  domestic  borrowing,  as  the  United  States 
government  advances  then  became  available. 

The  following  table  shows  the  above  mentioned  facts: 

Outstanding  Public  Debt  of  Great  Britain  Classified  at  Given 

Dates* 
(in  million  pounds) 


Aug.  I, 
1914 

Mar.31, 
1915 

Mar.31, 
1916 

Mar.31, 
1917 

Mar.31, 
1918 

Mar.31, 
1919 

Increase 
1919 
over 
1914 

Old  sources: 

Long  term 

Short  term .... 

616.3 
37.0 

960.4 
144.6 

1307.4 
743.8 

2386.9 
784.0 

3134.7 
1365. I 

4104.4 
1349.6 

3488.1 
1312.6 

Total  old 
sources .... 

New  sources: 

Long  term 

Short  term .... 

653-3 

1105.0 

2051.2 

62.0 
19.9 

3170.9 

466.0 
217.5 

4499.8 

I 148. 9 
192.3 

5454  0 

1614-5 
456-5 

4800.7 

1614.5 
456.5 

Total  new 
sources. . .  . 

Grand  total  all 
sources 

653 -3 

1105.0 

81.9 
2133  I 

683.5 
3854.4 

1341-2 
5841.0 

2071.0 
75250 

2071.0 
6871.7 

*Later  figures  are  given  weekly  in  the  London  Economist. 

The  significance  of  these  figures  becomes  more  obvious  when 
the  table  is  given  on  a  percentage  basis: 

Of  the  total  increase  in  the  public  debt,  about  70  per  cent  was 
obtained  from  old  sources  and  about  30  per  cent  from  new  sources; 


BRITISH   PUBLIC    FINANCE 


6l 


about  75  per  cent  was  in  long-term  loans  and  about  25  per  cent 
in  short-term  loans. 


Aug.  I, 
1914, 

Mar.31, 
1915, 

Mar.31, 
1916, 

Mar.31, 
1917, 

Mar.31, 
1918, 

Mar.3x, 
1919, 

Increase 
1919 
over 

per 

per 

per 

per 

per 

per 

1914, 
per  cent 

cent 

cent 

cent 

cent 

cent 

cent 

Old  sources : 

Long  term 

94-3 

86.9 

61.4 

61.9 

53-7 

54-5 

50.8 

Short  term .... 

S-7 

131 

34-8 

20.3 

23-3 

17.9 

19.1 

New  sources. 

Long  term 

0.0 

0.0 

2.9 

12. 1 

19.7 

21-5 

23-5 

Short  term .... 

0.0 

0.0 

0.9 

5-7 

3-3 

6.1 

6.6 

Total  from— 

Old  sources 

100. 0 

100. 0 

96.2 

82.2 

77.0 

72.4 

69.9 

New  sources . . . 

0.0 

0.0 

3-8 

17.8 

23.0 

27.6 

30.1 

Total  in- 
Long  term 

94-3 

86.9 

643 

74.0 

73-4 

76.0 

74-3 

Short  term .... 

5-7 

13  I 

35-7 

26.0 

26.6 

24.0 

25-7 

The  total  debt  outstanding  on  November  30,  1920,  was 
£7735.6  millions  equivalent  to  $37,620  millions  at  parity.  In 
reply  to  an  interpellation  in  the  House  of  Commons,  the  Chancellor 
of  the  Exchequer  gave  the  details  of  the  national  debt  as  follows:^ 


Form  of  debt 


Amount  in 
millions  sterling 


Funded  debt  (25  per  cent,  consols,  etc.) 

Terminable  annuities 

3^-per  cent,  war  loan,  1925-1928 

45-per  cent,  war  loan,  1925-1945 

5-per  cent,  war  loan,  1929-1947 

4-per  cent,  war  loan,  1929-1942 

4-per  cent.funding  loan,  1960-90 

4-per  cent.  Victory  bonds 

Exchequer  bonds,  1920,  1921,  1922,  1925,  and  1930. 

4-  and  S-per  cent,  national  war  bonds 

Treasury  bonds,  5-15  year 

Treasury  bills 

Ways  and  means  advances 

National  savings  certificates 

Other  debt  (chiefly  foreign  debt) 


3150 
18. 5 
62.7 
12.8 

1949 -3 

67.  2 

407.0 

357-7 

3150 

1441 .0 
13-8 

iiii.S 
222.6 
277.9 

"63. s 


Total. 


7735-6 


'  House   of   Commons   debates,   Dec.   9,   1920   and   Dec. 
also  statement  of  National  Debt  and  Assets,  Mar.  31,  1920. 


16,   1919.     See 
(Cmd.  780.) 


62 


INTERNATIONAL    FINANCE   AND    ITS    REORGANIZATION 


The  distribution  of  the  debt  by  maturities  is  given  elsewhere 
in  this  chapter. 

i.  Ways  and  Means  Advances 

The  net  increase  in  Ways  and  Means  Advances  from  August 
I,  1 91 4,  to  March  31,  191 9,  was  £455,500,000.  The  net  advances 
each  year  were  as  follows: 


Fiscal  year 

Millions  sterling 

1915-16 
1916-17 
1917-18 
1918-19 

Total 

18.9 
197.6 

25.2* 
264.2 

455-5 

*  Decrease  for  the  vear. 


Ways  and  Means  advances  were  credits  on  the  books  of  the 
Bank  of  England.  They  were  used  when  credit  was  needed 
promptly,  and  were  retired  when  treasury-  bills  were  issued  or 
when  war  loans  were  floated. 


ii.  Treasury  Bills 

The  treasury  bill  was  utilized  as  a  fiscal  device  in  Great  Britain 
and  at  the  declaration  of  war  there  were  about  £10,000,000  of 
treasury  bills  outstanding.  The  old  pre-war  system  of  tendering 
for  bills  was  discontinued  and  in  its  place  rates  of  discount  were 
adjusted  to  produce  the  supply  of  short-term  funds  needed  by  the 
government.  Treasury  bills  ran  for  three,  six,  nine  and  twelve 
months,  and  were  discounted  by  the  Bank  of  England  and  the 
joint-stock  banks.  Before  the  war,  banks  were  the  chief  pur- 
chasers.   During  the  war  private  investors  bought  them  extensively. 

As  the  war  continued,  increasing  amounts  of  treasury  bills  were 
issued  so  that  in  September,  191 8,  about  £  1,000,000,000  were  out- 
standing. As  the  outstanding  amounts  increased,  the  volume  be- 
came unmanageable  and  interest  rates  rose;  and  as  a  measure  of 
expediency  successive  war  loans  were  issued  to  reduce  the  volume 
of  treasury  bills. 


BRITISH   PUBLIC    FINANCE 


63 


The  floating  of  long-term  loans  was  rendered  necessary  because 
of  the  fact  that  the  rates  on  treasury  bills  had  increased  so  as  to 
make  the  long-term  loan  the  more  economical  and  less  un- 
manageable form.  Treasury  bills  were  accepted  in  payment  of 
war  loans  so  that  for  example  between  December  of  19 16  and 
April,  191 7,  there  was  a  reduction  of  over  £600,000,000  in 
treasury  bills,  of  which  about  £130,000,000  was  used  for  subscrip- 
tion to  the  loan.  The  sale  of  treasury  bills,  which  had  been  dis- 
continued in  1916,  was  resumed  in  March  of  191 7  on  the  old  pre- 
war system  of  tender.  During  the  fiscal  year  1917-18,  treasury 
bills  were  used  extensively;  about  £500,000,000  net  were  issued. 
In  the  fiscal  year  1919,  there  was  a  net  decrease  in  the  amount  of 
treasury  bills  outstanding. 

To  the  investor,  the  advantage  of  treasury  bills  lay  in  the  fact 
that  they  were  a  convenient  investment  for  temporarily  idle  funds. 
Their  liquid  character  made  them  practically  the  equivalent  of 
cash.  To  the  Government,  the  treasury  bill  was  a  quick  means 
of  securing  funds.  On  the  other  hand,  the  disadvantage  of 
treasury  bills  was  that  they  matured  at  short  intervals  and  con- 
stituted a  serious  refunding  problem  when  the  volume  outstanding 
became  very  great. 

The  net  issue  of  treasury  bills  was  as  follows: 


Fiscal  year 
ending  March  31 

Millions  sterling 
(increase) 

191S 
1916 
1917 
1918 
1919 

Total 

61.7 
489.6 
103. 1  decrease 

509-7 
16. 4  decrease 

941 -S 

The  decreases  in  1917  and  1919  were  due  to  the  fact  that  more 
bills  were  retired  than  were  issued.  In  19 1 9  the  Drummond- 
Fraser  plan  of  continuous  borrowing  made  it  unnecessary  to  resort 
to  treasury  bills. 

War  expenditure  certificates  were  treasury  bills  running  for  two 
years.  They  were  issued  in  191 7  to  the  extent  of  about  £23,- 
600,000,  but  were  completely  retired  in  the  following  two  years. 


64 


INTERNATIONAL    FINANCE   AND    ITS    REORGANIZATION 


iii.  Exchequer  Bonds 

Like  treasury  bills,  exchequer  bonds  were  a  tested  fiscal  device 
before  the  World  War.  They  had  been  used  during  the  Crimean 
War  and  the  Boer  War.    The  bonds  were  issued  as  follows: 


Fiscal  year  ending 
March  31 

Millions  sterling 

1915 
1916 

1917 
1918 
1919 

Total 

46.9 
109.6 
143-3 

71  4 
0.9 

372.1 

The  issue  of  19 15  had  been  put  out  at  3  per  cent,  but  during 
19 1 6,  the  rate  was  raised  to  5  per  cent,  and  subsequently  to  6  per 
cent.  The  terms  ran  from  three  to  five  years.  The  increase  in 
rate  was  intended  to  deflect  new  money  from  the  short-term 
treasury  bills  into  the  longer-term  exchequer  bonds.  Indeed,  the 
rates  on  treasury  bills  in  191 6  were  reduced  for  this  reason. 
Furthermore,  the  high  interest  rate  on  exchequer  bonds  was  de- 
signed to  attract  foreign  capital  and  thus  to  stabilize  exchange.  As 
an  inducement  to  subscribe  to  exchequer  bonds,  they  were  made 
receivable  at  their  nominal  value  in  payment  of  excess-profits  taxes 
and  of  inheritance  taxes.  Furthermore,  they  were  receivable  at 
their  face  value  as  cash  for  subscription  to  war  loans.  During  the 
fiscal  years  19 18  and  1 919,  when  the  plan  of  continuous  day-to-day 
borrowing  was  practiced,  exchequer  bonds  were  issued  to  a  less 
extent  than  during  the  earlier  years  of  the  war. 


iv.  Long-Term  Bonds 

Great  Britain  issued  six  war  loans.  The  first  loan  was  issued 
at  95  and  bore  3^/2  per  cent  interest.  It  was  dated  March  i,  1915, 
was  redeemable  in  1925  and  matured  in  1928.  The  amount  raised 
was  £340,600,000. 

The  second  war  loan  was  issued  at  par,  bore  4^^  per  cent 
interest,  was  dated  June  i,  19 15,  was  redeemable  in  1925  and  due 
in  1945.    The  amount  raised  was  £576,600,000. 


BRITISH    PUBLIC    FINANCE  65 

The  third  war  loan  was  issued  in  two  forms.  The  taxable 
bonds  were  issued  at  95,  with  5  per  cent  interest  rate,  dated  June 
I,  191 7,  redeemable  in  1929,  and  due  in  1947.  The  tax-exempt 
bonds  were  issued  at  pa^-,  bore  4  per  cent  interest,  and  matured  in 
1942.  The  cash  raised  was  £962,200,000,  most  of  which  was  in 
the  taxable  form. 

The  fourth  war  loan  was  also  issued  in  both  tax-free  and  a 
taxable  form.  The  tax-free  bonds  were  sold  at  par,  bore  4  per 
cent  interest,  and  matured  in  1927.  The  taxable  bonds  were  sold 
at  par,  bore  5  per  cent  interest,  and  matured  in  five,  seven,  and 
ten  years.  They  were  issued  continuously  after  October  i,  19 17, 
under  the  Drummond-Fraser  plan  of  day-to-day  borrov/ing. 

The  19 1 8- 1 9  National  War  Bonds  were  also  sold  continuously 
under  the  Drummond-Fraser  plan,  the  advantages  of  which  were 
that  interest  was  saved  on  idle  borrowed  funds  and  that  subscrip- 
tions were  stimulated  out  of  savings  rather  than  out  of  borrowings 
at  the  banks. 

The  sixth  war  loan  was  issued  on  February  1,  1919.  Again, 
there  were  two  forms,  a  5  per  cent  taxable  bond  and  a  4  per 
cent  tax-exempt  bond.  The  issue  and  redemption  prices  were  the 
same  as  on  the  former  loan,  which  were  redeemable  at  a  slight 
premium  above  par. 

The  seventh  war  loan  of  5-15  year  treasury  bonds  was  issued 
in  the  spring  of  1920  for  the  sole  purpose  of  repaying  the  floating 
debt  consisting  of  treasurj-  bills  and  Ways  and  Means  advances 
of  the  Bank  of  England.  The  treasury  bonds  were  issued  con- 
tinuously under  the  Drummond-Fraser  plan,  and  in  order  to  fund 
the  floating  debt  the  new  bonds  were  to  pay  a  rate  of  interest  I  per 
cent  higher  than  the  annual  average  treasury  bill  when  the  average 
rate  was  from  5}"^  to  6j^  per  cent,  and  2  per  cent  higher  when 
the  average  rate  was  6^  per  cent  or  over.  After  1925,  the  rate  of 
5  per  cent  goes  into  effect  and  holders  may  demand  repayment 
at  par  upon  one  year's  notice.  The  bonds  are  due  in  1935  and 
redeemable  by  the  government  after  1925  upon  specified  notice. 

Aside  from  the  perpetual  debt  and  the  4  per  cent  loan  maturing 
i960  to  1990,  maturities  of  the  British  war  bonds  range  up  to 
1947- 

The  national  debt  reached  a  high  figure  of  £8079  million  on 
January  i,  1920,  and  was  reduced  by  £237  million  during  the 
calendar  year  to  £7842  million.     The  budget  for  the  fiscal  year 


66  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

ending  March  31,  1921,  had  a  surplus  of  £230  million  which  was 
applied  to  the  further  reduction  of  the  debt.  About  £30  million 
of  long-term  bonds  were  retired  out  of  the  statutory  sinking  fund. 

(a)  Inducements  to  Subscribe — 

Subscribers  to  the  first  loan  had  the  privilege  for  three  years  of 
borrowing  at  the  Bank  of  England  up  to  the  issue  price  of  the 
bonds.  In  the  second  loan,  payments  were  accepted  in  3^^  per  cent 
consols  at  66%,  slightly  above  the  then  existing  market  price. 
Furthermore,  holders  of  the  second  loan  had  the  right  to  convert 
into  future  loans,  issued  at  a  higher  rate.  Subscribers  to  the  third 
loan  were  offered  a  choice  of  a  taxable  or  a  tax-exempt  bond. 
Holders  of  the  fourth  war  loan  had  the  privilege  of  converting 
their  bonds  into  the  third  war-loan  bonds.  As  a  further  induce- 
ment to  subscribe,  in  connection  with  the  third  war  loan  one- 
eighth  of  one  per  cent  a  month  was  set  aside  to  maintain  the  market 
price  of  the  bonds.  Finally,  most  of  the  war  loans  of  Great 
Britain  were  issued  below  par,  the  total  loans  of  about  £5,200,- 
000,000  par  value  being  issued  at  an  average  price  of  96.45,  and 
the  National  War  bonds  being  payable  at  a  premium  of  two,  three, 
and  five  points,  depending  upon  the  term  of  the  bond. 

(b)  Control  of  Capital  Issues — 

I.  Procedure — The  control  of  new  issues  of  capital  by  the 
British  government  under  conditions  accepted  by  the  stock  ex- 
changes in  the  United  Kingdom,  began  when  the  London  Stock 
Exchange  was  reopened  in  January,  191 5.  By  the  terms  of  this 
agreement  the  Coaimittee  of  the  Stock  Exchange  bound  the  mem- 
bers, under  penalty  of  expulsion,  to  certain  regulations  approved 
by  the  British  Treasury.  Under  the  regulations  afJecting  new 
issues  of  capital,  no  dealings  were  to  be  allowed  on  the  stock 
exchanges  in  any  new  securities  unless  the  issue  had  been  first 
approved  by  the  Treasury. 

The  procedure  adopted  by  the  committee  was  to  deal  with  the 
cases  involving  smaller  amounts  in  summary  fashion  and  to  refuse 
applications  for  new  issues  unless  a  good  case  had  been  made  out, 
either  (a)  that  the  new  issue  was  essential  to  the  prosecution  of 
the  war  or  (b)  that  the  refusal  to  approve  the  new  issue  would 
involve  a  heavy  or  an  entire  lose  of  previously  expended  capital. 
After  a  transition  period  covering  the  year  19 15,  no  new  issues 


BRITISH    PUBLIC    FINANCE 


67 


of  any  sort  except  for  renewal  purposes  were  approved  unless  they 
were  essential  for  the  prosecution  of  the  war.  With  regard  to  the 
question  of  capital  expenditures  or  borrowings  by  the  local  or 
municipal  authorities  in  Great  Britain,  it  was  urged  upon  the 
officials  to  preserve  capital  and  labor  in  the  country  for  the  prosecu- 
tion of  the  war  and  to  defer  capital  expenditure.^ 

2.  Effects — The  effect  of  these  restrictions  was  to  curtail  very 
greatly  the  total  volume  of  capital  issues.  Taking  the  total  for  the 
year  191 3  as  a  base  of  100  the  issues  in  1 91 5  were  34  per  cent,  in 
1916  14  per  cent,  in  1917  11  per  cent,  and  in  1918  27  per  cent. 
That  is  in  four  years,  19 15  through  191 8,  the  total  new  securities 
issued  were  only  86  per  cent  of  the  issues  in  the  single  year  19 1 3. 
The  restrictions  on  issues  during  the  war  resulted  in  very  large 
issues  after  the  war.  The  issue  of  new  securities  in  Great  Britain 
since  1911  is  given  herewith.  British  government  loans  are  ex- 
cluded. 

New  Capital  Issued  by  Years  * 


Year 

In  million 
pounds 

Relative  figures, 

1 913  figures  as 

100 

1911 

192 

79 

1912 

207 

86 

1913 

242 

100 

1914 

200 

82 

191S 

83 

34 

1916 

35 

14 

1917 

26 

II 

1918 

65 

27 

1919 

238 

98 

1920 

384 

159 

•Memorandum  of  Basil  P.  Blackett,  Esq.,  Secretary  of  the  Capital 
Issues  Committee  of  Great  Britain  (subsequently  financial  advisor  of  the 
British  Embassy),  addressed  to  James  F.  Curtis,  Secretary  of  the  New 
York  Federal  Reserve  Bank,  Aug.  6,  1917.  This  was  submitted  in  the 
testimony  of  Vice-governor  Warburg  in  the  hearings  before  the  Senate 
Committee  on  Finance,  Feb.  8,  1918,  on  S.  3714,  "A  Bill  to  Create  a  War 
Finance  Corporation."  Submitted  also  before  the  Committee  on  Ways  and 
Means  of  the  House,  Feb.  19,  1918,  on  H.  R.  9499. 

^London  Joint  City  and  Midland  Bank  Circular,  January,  1921. 

For  detail  classification  see  article.  Capital  Issues  in  1920.  Statist, 
January  8,  1921,  p.  50. 


68  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

V.   War  Savings  Certificates 

These  were  issued  for  the  small  investors  through  thousands 
of  associations,  formed  to  encourage  purchase  on  the  installment 
plan.  The  total  amount  sold,  chiefly  during  the  latter  part  of  the 
war,  was  over  two  hundred  millions  sterling.  They  were  tax 
exempt  and  were  issued  in  several  denominations. 

vi.  Foreign  Borroivings 

The  course  of  British  public  finance  was  from  short-term  to 
long-term  loans,  both  domestic.  When  the  demand  for  goods  out-». 
ran  the  supply  of  domestic  credit,  Britain  turned  to  the  United 
States  and  with  difficulty  raised  in  the  open  market  an  unsecured 
loan.  Subsequently,  loans  secured  by  collateral  were  sold  to 
private  investors  and  finally,  when  the  United  States  entered  the 
war,  government  credits  were  advanced  by  the  United  States  to 
her  allies. 

(a)  Unsecured  Loans — 

In  conjunction  with  France,  Great  Britain  proposed  to  float  a 
$1,000,000,000  bond  issue  in  the  United  States.  The  unfamiliarity 
with  foreign  securities  on  the  part  of  the  American  investor  led 
the  mission  which  arranged  the  loan  to  reduce  the  amount  to 
$500,000,000.  The  loan  was  dated  October  15,  191 5,  and  was  due 
October  15,  1920.  It  was  issued  at  98  and  bore  5  per  cent  interest. 
A  syndicate  of  288  financial  institutions  underwrote  the  issue.  This 
was  an  unsecured  loan,  the  largest  foreign  loan  ever  placed  in  the 
United  States,  and  the  largest  single  issue  since  the  Civil  War,  and 
therefore  not  a  complete  success. 

The  British  Government  also  raised  an  unsecured  three-year 
loan  in  Japan  in  December,  1916,  equivalent  to  £10,000,000  at  6 
per  cent.  The  proceeds  of  the  loan  were  devoted  to  the  purchase 
of  dollar  balances  in  America  which  were  held  on  Japanese 
account. 

(b)  Treasury  Bills — 

By  means  of  treasury  bills,  funds  can  be  obtained  without  the 
elaborate  preparations  that  precede  the  floating  of  a  long-term  loan. 
After  the  war  had  been  waged  for  two  years,  it  became  increas- 
ingly diflScult  to  secure  credit  in  Great  Britain  for  the  purchase  of 


BRITISH    PUBLIC    FINANCE  69 

supplies  in  the  United  States.  Two  secured  loans  had  been  placed 
since  the  unsecured  loan  of  October,  191 5.  Further  credits  were 
needed,  and  for  this  purpose  British  treasury  bills  were  placed  in 
the  United  States.  In  November,  1916,  the  Federal  Reserve  Board 
cautioned  its  member  banks  against  locking  up  their  funds  in  obli- 
gations of  foreign  governments  which  were  short-term  in  form,  but 
either  by  contract  or  force  of  circumstances  might  have  to  be  re- 
newed continually  and  thus  constitute,  in  reality,  a  long-term 
obligation.  After  the  United  States  entered  the  war,  military 
considerations  outweighed  banking  expediency.  On  August  I, 
191 7,  the  British  government,  through  J.  P.  Morgan  &  Company, 
its  fiscal  agents,  floated  60  and  90  day  dollar  treasury  bills  in  the 
New  York  markets.  Up  to  November  11,  191 8,  the  date  of  the 
armistice,  the  maximum  outstanding  amounted  to  $84,405,000. 
The  rate  rose  from  5  per  cent  to  6  per  cent. 

(c)   Mobilizatio7i  of  Securities — 

The  mobilization  of  American  securities  held  in  Great  Britain 
was  effected  for  the  purpose  of  stabilizing  foreign  exchange  rates. 
In  19 1 5  insurance  and  trust  companies  in  Great  Britain  were  re- 
quested to  sell  or  lend  specified  American  securities  to  the  Treasury. 

"A  scheme  setting  forth  the  conditions  under  which  the  securi- 
ties would  be  purchased  or  accepted  on  loan  was  published. 

"i.  Purchase — The  Treasury  undertook  to  purchase  any 
suitable  dollar  securities,  at  prices  based  on  current  New  York 
Stock  Exchange  quotations,  the  sterling  price  to  be  paid  being  cal- 
culated at  the  exchange  of  the  day;  in  the  case  of  no  reliable 
quotation  being  available,  the  price  was  to  be  fixed  by  agreement. 

"2.  Deposit  on  Loan — Securities  loaned  to  the  Treasury 
were  to  be  accepted  for  two  years  from  the  date  of  deposit,  on  the 
understanding  that  the  interest  received  on  such  securities  would 
be  paid  to  the  depositor  together  with  an  additional  payment  at 
the  rate  of  one-half  of  one  per  cent  per  annum  on  the  nominal 
amount  of  the  security.  .  .  .  Owners  had  the  option  to  release 
securities  so  deposited  or  they  could  be  sold  on  behalf  of  the  de- 
positor, the  understanding  in  each  case  being  that  the  equivalent 
value  in  sterling  at  the  exchange  of  the  day  should  be  paid  in 
London."  ^* 

^^Report  of  the  American  Dollar  Securities  Committee,  Nov.  20,  1919, 
submitted  to  the  House  of  Commons. 


70  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  appeal  to  the  holders  did  not  produce  American  securities 
in  sufficient  volume,  and  the  Treasury  thereupon  resorted  to  coer- 
cion and  in  May,  191 6,  levied  a  special  tax  of  10  per  cent  on  the 
income  derived  from  all  issues  which  were  eligible  for  purchase  or 
loans,  and  which  were  not  surrendered.  As  the  depreciation  of 
exchange  became  increasingly  difficult  to  check,  further  coercion 
was  resorted  to  and  the  British  Treasury  was  empowered  to  com- 
mandeer eligible  securities  and  to  place  restrictions  upon  holders. 
Upon  relinquishing  control  of  dollar  securities  in  April,  1919,  more 
than  1,800  issues  of  stocks  and  bonds  of  American  origin  had  been 
surrendered.  If  sterling,  franc,  krone,  and  florin  bonds  be  included, 
the  total  number  of  securities  was  2027. 

The  aggregate  of  all  securities  mobilized  was  £622,595,000,  of 
which  £216,644,000,  or  about  35  per  cent,  were  purchased,  and 
£405,951,000,  about  65  per  cent,  were  loaned.  The  American 
securities  mobilized  totaled  £250,543,000,  of  which  £177,614,000, 
or  70  per  cent,  were  purchased  by  the  Treasury  and  £72,929,000, 
or  30  per  cent,  were  loaned  to  the  Treasury.  The  American  securi- 
ties mobilized  were  40  per  cent  of  the  total  amount.  Of  the  loaned 
securities,  the  American  were  about  18  per  cent  in  amount.  Of  the 
purchased  securities,  the  American  were  about  82  per  cent  in  amount. 

(d)  Secured  Loans — 

As  a  result  of  the  mobilization  of  securities.  Great  Britain 
floated  a  loan  for  $250,000,000,  secured  by  collateral  valued  at 
about  $300,000,000,  dated  September  i,  1916,  and  maturing  Sep- 
tember I,  19 1 8.  The  bonds  bore  5  per  cent  interest,  were  under- 
written at  98,  and  sold  at  99.  The  loan  was  a  success.  At 
maturity  it  was  paid  off  from  the  proceeds  of  the  sale  of  the 
collateral. 

In  October,  19 16,  a  second  loan  secured  by  collateral  was 
placed  in  the  United  States.  The  par  amount  of  the  loan  was 
$300,000,000,  and  it  was  dated  November  i,  191 6.  One-half  of 
the  loan  was  in  the  form  of  three-year  notes,  and  the  other  half 
in  the  form  of  five-year  notes.  The  prices  were  99^4  ^"d  98/4 
respectively,  and  the  rate  of  interest  5^  per  cent.  The  half  of 
the  loan  maturing  in  19 19  was  refunded  by  the  issue  of  $250,- 
000,000  of  53/^  per  cent  three-year  notes  and  ten-year  bonds,  oflFered 
at  98  and  9634  respectively,  and  both  convertible  into  national  5 
per  cent  War  Bonds  at  a  rate  of  exchange  fixed  at  $4.30.  The 
half  maturing  in  1921  was  paid  off. 


BRITISH    PUBLIC    FINANCE  7 1 

The  last  of  the  series  of  loans  raised  by  Great  Britain  in  the 
United  States  during  the  period  of  American  neutrality  was 
floated  on  February  i,  1917.  American  and  foreign  securities  con- 
stituted the  collateral.  The  total  issue  amounted  to  $250,CXX),000, 
divided  into  $ICX),000,000  of  one-year  notes  and  $150,000,000  of 
two-year  notes.  The  rate  of  interest  was  53^  per  cent,  and  the 
issue  prices  were  99.52  and  99.07  respectively.  The  notes  were 
convertible  at  the  option  of  the  holder  into  5^  per  cent  bonds  of 
the  United  Kingdom,  due  in  1937.  The  $100,000,000  due  in  1918 
was  paid  off,  and  $143,587,000,  practically  the  balance  of  the 
issue,  was  converted. 

The  total  amount  of  British  loans  sold  privately  in  the  United 
States  was  $1,050,000,000. 

(e)  The  Financial  Impasse — 

By  the  spring  of  191 7,  the  burdens  on  the  British  Treasury 
were  becoming  difficult  to  bear.  During  the  fiscal  year  ending 
March  31,  191 7,  the  treasury  bills  floated  amounted  to  about 
£1,790,000,000,  as  compared  with  about  £500,000,000  during  the 
previous  fiscal  year  and  a  similar  amount  for  the  following  fiscal 
year.  Britain  was  finding  the  task  of  financing  herself  and  her  allies 
from  domestic  credit  sources  almost  impossible.  It  was  becoming 
increasingly  diflicult  and  dangerous  to  British  bank  credit  to  export 
gold.  Unsecured  loans  in  the  United  States  were  not  popular, 
and  securities  to  be  used  as  collateral  were  limited. 

The  seriousness  of  the  situation  is  described  by  J.  M.  Keynes, 
representative  of  the  British  Treasury  at  the  Peace  Conference: 

"The  financial  history  of  the  six  months  from  the  end  of  the 
summer,  19 16,  up  to  the  entry  of  the  United  States  in  the  war 
in  April,  191 7,  remains  to  be  written.  Very  few  persons,  outside 
the  half  dozen  officials  of  the  British  Treasury  who  lived  in  daily 
contact  with  the  immense  anxieties  of  impossible  financial  require- 
ments of  those  days,  can  fully  realize  what  steadfastness  and  courage 
were  needed,  and  how  entirely  hopeless  the  task  would  soon  have 
become  without  the  assistance  of  the  United  States  Treasury."  ^^ 

(f)  United  States  Government  Advances — 

Upon  the  entrance  of  the  United  States  into  the  war,  Great 
Britain's  financial  problem  of  finding  credits  for  herself  and  her 

^^The  Economic  Consequences  of  the  Peace,  footnote  on  p.  273,  American 
Edition. 


72 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


allies  was  solved.  The  United  States  extended  credits  to  Great 
Britain,  and  through  her  as  well  as  directly  made  advances  to  the 
Allies. 

The  first  advance  made  by  the  United  States  to  Great  Britain 
on  April  25,  1 91 7,  amounted  to  $200,000,000.  The  rate  of  in- 
terest was  3  per  cent  per  annum  until  June  30,  191 7,  and  3^ 
per  cent  thereafter  until  such  time  as  the  United  States  had  to  pay 
a  higher  rate  to  her  own  bondholders. 

Up  to  June  15,  1920,  the  United  States  government  advanced 
to  Great  Britain  about  $4,277,000,000,  which  was  about  45  per 
cent  of  the  total  cash  advances  made  to  foreign  governments  by 
the  United  States,  and  about  12  per  cent  of  the  total  indebtedness 
of  Great  Britain  at  the  end  of  the  war. 


(g)  Loans  to  Allies  and  Dominions — 

The  loans  to  the  British  dominions  and  to  Britain's  allies  offset 
the  British  borrowings  in  the  United  States.  As  of  March  31, 
1920,  the  total  British  loans  amounted  to  about  £1,850,000,000, 
or  about  22  per  cent  of  the  total  borrowings,  domestic  and  foreign. 

Great  Britain's  Lo.vns  to  Allies  and  Dominions  ^ 


Loans  to  Allies  to  March  31,  1920 

Russia 

France 

Italy 

Belgium 

Serbia 

Rumania  and  others 

Relief  loans 

Total 

Loans  to  Dominions 

Australia 

New  Zealand 

Canada 

South  Africa 

Other  dependencies 

Total 

Grand  total 


In  million  pounds 


Per  cent  of  total 


568.0 

514-8 

455  5 

97-3 

20.9 

66.6 


1731-1 


30.6 
27.9 
24.6 

5-3 
I .  I 
36 

0.4 


93 -S 


Si-6 

2.8 

29.6 

1.6 

19.4 

I.O 

iS-8 

0.9 

3-1 

0.2 

II9-S 

6.5 

1850.6 

100. 0 

'Budget  speech  of  Austen  Chamberlain. 


BRITISH    PUBLIC    FINANCE 


73 


The  Chancellor  of  the  Exchequer  estimated  that  in  normal  years 
the  British  government's  receipts  from  interest  on  its  loans  will 
balance  the  interest  on  its  borrowings  from  the  United  States  gov- 
ernment. But  as  a  matter  of  fact  the  loans  to  Dominions  and  Alh'es 
are  being  carried  at  50  per  cent  of  t'^eir  face  value.  Even  at  that 
figure,  it  is  doubtful  whether  the  loans  and  borrowings  of  Great 
Britain  will  offset  each  other,  either  in  the  payment  of  interest,  or 
in  the  re-payment  of  the  principal. 


(h)   Total  Foreign  Borrowings — 

On  March  31,  1919,  the  British  foreign  debt  was  £1,364,- 
850,000  and  by  March  31,  1920,  it  had  been  reduced  to  £1,278,- 
714,000.  Advances  by  the  United  States  government,  equivalent 
to  about  £880  million,  constituted  the  largest  item  in  the  British 
foreign  debt ;  private  borrowings  in  the  United  States  ranked  next, 
and  borrowings  in  Canada  ranked  third.  Like  her  investments, 
British  borrowings  were  world-wide — in  Europe,  North  and  South 
America,  Asia  and  the  islands  of  the  Pacific.  During  the  year  the 
reduction  of  £86  million  resulted  from  the  repayment  of  the 
British  share  of  the  Anglo-French  loan,  and  part  of  the  £150 
million  advances  by  Canadian  banks.  Payments  were  also  made  to 
Norway,  Sweden,  Switzerland  and  Holland. 

External  Debt  of  Great  Britaln  ^ 
(in  millions  sterling) 


Countries 

United  States 

Canada 

Japan 

Argentina 

Uruguay 

Netherlands 

Sweden 

Spain 

Fiji 

Straits  Settlements 

Mauritius 

Sundry  Allies 

Total 


Maturity 


Amounts 


Sundry 
Sundry 
Sundry 

1046.8 

73-4 
7.2 

1921 

19.2 

1921 

6.0 

1920 

0.7 

1921 

0.8 

1928 

2-5 

1920 
Sundry 

0.4 

7-7 

1922 

o-S 

II3-5 

1278.7 


"House  of  Commons  Paper,  144.  Returns  of  the  external  debt  as  of 
March  31,  1919,  and  1920,  showing  the  external  debt,  the  due  date  and 
the  arrangements  for  repayment.     H.  M,  Stationery  Office,  August,  1920, 


74 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


C.  Taxes 
(i)  The  Taxation  Policy — 

In  general,  the  taxation  policy  of  Great  Britain  during  the  war 
was  greatly  to  increase  her  direct  taxes  and  to  rely  on  a  limited 
number  of  sources  of  revenue.  The  British  tax  policy  was  not  the 
result  of  experimentation  in  a  wide  field,  such  as  prevailed  on  the 
Continent.  The  exception  to  this  principle  was  the  development 
of  the  munitions-profits  tax  and  the  excess-profits  tax.  In  the 
fiscal  year  1914,  the  income  tax,  the  chief  direct  tax,  produced 
about  24  per  cent  of  the  total  tax  revenue,  in  1916  about  38  per 
cent.  After  the  fiscal  year  191 7,  the  two  direct  taxes,  the  income 
tax  and  excess-profits  tax,  produced  over  60  per  cent  of  the  total 
revenue  from  taxation,  direct  or  indirect.  The  non-tax  revenues 
declined,  as  might  have  been  expected.  They  were  not  capable  of 
expansion  pari  passu  with  the  tax  revenues.  The  slogan,  "Business 
as  Usual,"  prevalent  in  England  during  the  early  part  of  the  war, 
made  it  difficult  to  curb  civilian  consumption  by  restrictive  taxa- 
tion.   Luxury  taxes  were  introduced  late  in  the  war. 

Britain's  tax  policy  reflects  sound  economic  thinking.  The 
total  revenue  in  1919  was  4.5  times  as  great  as  in  19 14. 

The  tax  revenue  in  1919  showed  an  even  greater  increase  over 
191 4,  4.84  times.  The  revenue  from  the  income  tax  in  19 19  was 
6.17  times  as  great  as  in  19 14  and  that  from  the  combined  income 
and  excess-profits  tax  in  19 19  was  12.20  times  as  great  as  the 
revenue  from  the  income  tax  in  19 14.  The  indirect  taxes  did  not 
increase  to  the  same  extent.  The  customs  revenue  in  1919  was 
only  2.98  times  as  great  as  in  191 4  and  the  excise  tax  only  1.50 
times  as  great.  Non-tax  revenues  in  19 19  were  2.97  times  as  great' 
as  in  1914. 

The  distribution  by  percentages  of  taxes  for  the  years  19 14  to 
1919  is  shown  herewith: 


Source 

1914 
Per  cent 

191S 
Per  cent 

1916 
Per  cent 

1917 
Per  cent 

1918 
Per  cent 

1919 
Per  cent 

Income  tax 

239 
82.2 
17.8 

30.6 
83.5 
16. 5 

38.1 
86.1 
139 

35-3 
24.4 
89.7 

10.3 

33-9 
311 
86.7 

13-3 

32.7 
32.1 
88.2 

Excess  profits 

Total  tax 

Non  tax  revenues. . . 

II. S 

Grand    total   rev- 
enue  

100. 0 

100. 0 

100. 0 

100. 0 

100. 0 

lOO.O 

BRITISH    PUBLIC    FINANCE 


75 


Throughout  the  war,  there  was  a  continuous  increase  in  the 
actual  revenue,  and  leaving  out  of  consideration  the  year  191 5, 
when  the  expenditures  were  rather  low,  a  continual  increase  in 
the  ratio  of  revenues  to  expenditures  and  of  the  ratio  of  taxes  to 
expenditures.  The  revenues  collected  in  the  fiscal  years  ending 
March  31  were  as  follows: 


Year 

Millions  sterling 

1914 

191S 
1916 
1917 
1918 
1919 

Total,  1915-1919. 

197.2 
226.7 
336.8 

573-4 
707.2 
888.8 

2930.1 

The  important  items  of  revenue  during  the  war  are  given 
by  fiscal  years  ending  March  31,  on  page  76. 

ii.  Direct  Taxes 

Direct  taxation  produced  over  60  per  cent  of  the  total  tax 
revenues  after  the  excess-profits  tax  came  into  full  effect  in  the 
fiscal  year  191 7.  In  the  first  two  j^ears  of  the  war  the  income 
tax,  which  was  the  chief  direct  tax,  brought  in  an  increasing  per- 
centage of  the  total  tax  revenue,  and  rose  from  29  per  cent  in  1914 
to  36  per  cent  in  191 5  and  44  per  cent  in  1 91 6. 

The  munitions  levy  (subsequently  abandoned),  and  the  excess- 
profits  tax  were  the  sole  new  sources  of  direct  tax  revenue.  The 
increase  in  the  amount  of  direct-tax  revenue  was  due  in  part  to  a 
continuous  raising  of  the  rates  of  old  taxes  and  in  part  to  the  intro- 
duction of  the  new  tax. 


(a)  Income  Tax — 

In  the  first  war  budget  in  the  fall  of  19 14  the  rates  on  the 
income  tax  were  doubled.  In  the  following  fiscal  year  the  normal 
tax  rate  was  increased  and  the  exemption  limit  was  lowered  from 
£160  to  £130.  Furthermore,  supertaxes  from  lod.  to  3s.  6d.  were 
levied  on  incomes  of  £2,500  to  £10,000.  Unearned  incomes,  so 
called,  were  taxed  more  heavily  than  earned  incomes.     In  the  fiscal 


70 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


year  191 6-17  there  was  a  further  increase  in  rates,  the  minimum 
being  2s.  3d.  on  incomes  between  £130  and  £300  when  earned,  and 
3s.  on  unearned  incomes,  and  a  rate  of  5s.  in  the  pound  applying  on 
incomes  over  £2,500.  There  was  no  change  in  the  supertax  above 
this  sum.  But  in  the  fiscal  year  19 18- 1 9  the  supertax  was  raised  to 
from  IS.  to  4s.  6d.  in  the  pound.  There  were  no  further  increases 
in  the  rate  on  incomes  under  £500. 

Sources  of  Revenue  in  Gre.\t  Brit.\in  During  the  War^ 
(in  million  pounds) 


Source 

1914 

191S 

1916 

1917 

1918 

1919 

Ratio  of 

191 9  to 

1914, 

per  cent 

Tax  Revenues: 

Customs 

34.3 

39-6 
27.3 

47.2 

36.6 

42.3 
28.4 
69.4 

59-6 

61.2 

310 
128.3 

70.5 

56.4 

312 

205.0 

139 -9 

71.2 

38.8 

31  9 

239-5 

220.2 

102.8 

59-4 

30.2 

291.2 

285.0 

298 

Excise 

150 
III 

617 

Estate  duties 

Income  tax,  etc 

Excess  profits 

Stamps,     land     tax, 
house     duty     and 
other  minor  taxes  * 

Total  tax  revenues. 

Non-tax  Revenues: 

Postal  ser\'ice 

Miscellaneous 

Telegraph    and    tele- 
phone, Crown  lands, 
Suez  Canal,  etc.*. . 

162.0 
21.2 

2-3 

189.3 

20.4 
5-9 

290.1 

24.1 
9.8 

514.1 

243 
16. s 

613.0 

25-2 
52-1 

784.1 

29-4 
52-3 

484 

139 

2270 

Total    non-tax    rev- 
enues   

35-2 

37-4 

46.7 

59-3 

94.2 

104.7 

297 

Grand  total 

197.2 

226.7 

336.8 

573-4 

707.2 

888.8 

450 

*  Not  specified. 

The  yield  of  the  income  tax  was  £47.2  million  in  the  fiscal 
year  1914,  £69.4  million  in  the  fiscal  year  1915,  £128.4  million 
in  the  fiscal  year  1916,  £205.0  million  in  the  fiscal  year  1917, 
£239.6  million  in  the  fiscal  year  1918,  and  £291.2  million  in  the 
fiscal  year  1919. 

^  Finance  Accounts  of  the  United  Kingdom,  annual  House  of  Commons 
paper. 


BRITISH    PUBLIC    FINANCE  77 

(b)  Excess-Profits  Tax — 

This  tax  was  the  principal  innovation  in  British  tax  policy 
and  proved  to  be  a  fruitful  source  of  revenue.  The  British  excess- 
profits  tax  was  a  tax  on  war  profits,  that  is  on  profits  in  excess  of 
the  average  profits  of  any  two  of  the  three  pre-war  years.  It  bore 
no  relation  to  invested  capital  and  was  simpler  to  calculate  than 
the  American  excess-profits  tax.  It  was  introduced  in  the  budget 
of  September,  191 5.  The  rate  for  the  period  August  i,  19 14,  to 
July  I,  191 5,  was  50  per  cent  of  the  excess  over  the  pre-war 
standard.  In  the  fiscal  year  1916-17  the  rate  was  increased  to  60 
per  cent  and  as  a  result  the  returns  exceeded  the  estimates  by  over 
50  per  cent.  In  the  fiscal  year  191 7-1 8  the  rate  was  further  in- 
creased to  80  per  cent.  In  the  first  budget  after  the  war  the  rate 
was  reduced  to  40  per  cent  and  in  1921  finally  abolished.^ 

The  yield  on  the  excess-profits  tax  was  about  £140  million  in 
the  fiscal  year  ending  March  31,  191 7,  £220  million  in  the  fiscal 
year  191 8,  and  £285  million  in  the  fiscal  year  19 19. 

iii.  Indirect  Taxes 

Indirect  taxes  did  not  bring  increased  revenue  to  as  great  an 
extent  as  did  direct  taxes.  The  rates  on  the  old  taxes,  customs  and 
excise,  were  increased  and  a  few  new  indirect  taxes  were  levied. 

(a)  Customs  and  Excise  Taxes — 

In  the  first  war  budget  of  David  Lloyd  George  the  duty  on 
tea  was  raised  from  5d,  to  8d.  per  pound  and  the  duty  on  beer  was 
raised  from  7s.  9d  to  25s.  per  barrel.  In  the  fiscal  year  1916  the 
budget  of  Reginald  McKenna  raised  the  indirect  taxes  by  increas- 
ing the  rates  by  50  per  cent  on  tea,  cocoa,  coffee,  tobacco  and 
other  articles  of  general  consumption  and  by  lOO  per  cent  on  gaso- 
line and  patent  medicines.  In  the  fiscal  year  1916-17  the  existing 
rate  on  sugar  was  raised  50  per  cent,  on  tea  and  coffee  100  per  cent, 
and  on  cocoa  300  per  cent.  In  the  fiscal  year  191 7-1 8  the  rate  on 
tobacco  was  raised.  The  tax  on  most  other  commodities  was  left 
unchanged.  In  the  fiscal  year  191 8-19  the  increase  in  taxation  was 
obtained  chiefly  from  indirect  taxes.  The  direct  tax  rates  seem  to 
have  reached  the  limit  of  productivity.  The  rate  on  beer,  matches 
and  gasoline  was  doubled,  the  rate  on  sugar  was  raised  from  i  is.  8d. 

"Address  of  Austen  Chamberlain  at  Birmingham,  Feb.  3,  1921. 


78  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

to  25s.  8d.  per  hundredweight,  and  the  rate  on  tobacco  was  raised 
from  IS.  to  8s.  2d.  per  pound. 

(b)  Consumption  and  Luxury  Taxes — 

Although  every  tax  is  repressive  to  some  extent  and  the  customs 
and  excise  taxes  did  tend  to  check  consumption,  several  specific 
taxes  were  levied  with  the  aim  not  so  much  of  producing  revenue 
as  of  curtailing  the  use  of  non-essential  goods.  The$:  were,  how- 
ever, introduced  rather  late  in  the  war.  They  were  levied  on 
articles  that  had  been  free  from  taxation.  In  the  fiscal  year  1916 
an  import  tax  of  333^  per  cent  was  levied  on  motor  cars,  motor- 
cycles, musical  instruments,  and  cinema  films.     In  the  fiscal  year 

191 7  the  so-called  luxury  tax  was  extended  to  include  admission  to 
theaters,  moving  pictures  and  outdoor  sports.     In  the  fiscal  year 

191 8  a  very  high  tax  was  levied  on  dogs  newly  acquired  and  the 
tax  on  dogs  already  owned  was  increased,  with  the  prime  purpose 
of  checking  their  consumption  of  food.  In  the  fiscal  year  19 18-19 
a  luxury  tax  such  as  was  in  effect  in  the  United  States  was  levied 
on  two  classes  of  commodities,  ( i )  outright  luxuries  such  as 
jewelry,  perfumes,  pianos,  yachts,  etc.,  the  tax  on  which  was  applied 
regardless  of  the  price,  and  (2)  semi-luxuries  such  as  clothing, 
meals  and  lodging  at  clubs  and  hotels,  etc.,  which  were  subject  to 
tax  only  when  the  price  exceeded  specified  figures. 

(c)  Non-Tax  Revenues — 

The  non-tax  revenues  did  not  constitute  a  large  percentage  of 
the  total  revenues.  They  were  not  capable  of  expansion  to  the 
extent  that  the  tax  revenues  were.  In  19 14  they  constituted  about 
18  per  cent  of  the  total  revenue  and  in  191 9  about  12  per  cent. 
In  the  fiscal  year  1916  the  rates  on  postal,  telegraph  and  telephone 
service  were  increased  and  in  the  fiscal  year  1919  postal  rates  were 
further  increased  and  a  stamp  tax  on  checks  was  levied.^ 

D.  Problems  of  the  Post- War  Budget 

The  post-war  budget  bristled  with  difficulties.  The  magnitude 
of  the  debt-service  charges,  the  problems  of  reducing  military  and 
civil  expenditures,  of  maintaining  the  returns  from  the  income  and 

'  For  full  discussion  see  speeches  of  Austen  Chamberlain  and  interpella- 
tions, House  of  Commons  Debates,  April  30,  1919,  cols.  175  et  seq. 


BRITISH    PUBLIC    FINANCE 


79 


excess-profits  taxes,  of  balancing  the  budget,  of  meeting  the  deficit, 
and  of  handling  the  floating  debt, — these  were  a  few  of  the  diffi- 
culties that  faced  the  head  of  the  Treasury. 


i.  Comparison  of  Pre-War  and  Post-War  Budgets 

The  budget  for  1920-1921  called  for  a  revenue  7.5  times  as 
large  as  the  budget  for  1912-1913  and  the  revenue  in  the  supposedly 
normal  post-war  budget  set  up  by  the  Chancellor  of  the  Exchequer 
would  be  about  4.3  times  as  large. 

In  setting  the  hypothetical  budget  for  a  normal  year  the  Chan- 
cellor of  the  Exchequer  made  no  allowance  for  interest  on  ad- 
vances to  the  British  government  by  the  United  States.  The 
normal  budget  is  based  on  the  assumption  that  the  interest  due  to 
Great  Britain  will  offset  the  interest  due  by  Great  Britain.  On 
the  $4,277,000,000  owed  to  the  United  States,  the  annual  interest 
debit  will  be  about  £42,000,000.  This  assumption  is  open  to 
question. 


Budget  Figures  for  191 2-13,  Compared  with  Estimates  foe  1920-21 
AND  A  Normal  Post-war  Budget  1° 

(in  thousand  pounds  sterling) 


1912-13 

1920-21 

Normal  Post-war  Year 

Items 

Amount 

Per 

cent 

Rela- 
tive 
figure 

Amount 

Per 

cent 

Rela- 
tive 
figure 

Amount 

Per 

cent 

Rela- 
tive 
figure 

Revenxje 

Customs  and  excise . . 
Inland  revenue 

71,485 

83,268 

29,175 

4,874 

37-9 

44.1 

IS. 5 

2.5 

100 
100 
100 
100 

348,650 

686,500 

S3 ,000 

330,150 

24.6 

48.4 

3-7 

233 

488 

82s 

182 

6760 

290,000 

460,000 

43,000 

13,000 

36.0 

S7.0 

so 

2.0 

406 

SS2 

148 
266 

Non-tax  revenues .  .  . 

Total  revenues 

Expenditures 

Consolidated  fund. . . 
Army  and  navy  serv- 

188,802 

37,018 

72,436 
SI, 944 

27,224 

100. 0 

19.6 

38.4 
27s 

I4S 

100 

100 

100 
100 

100 

1,418,300 

376,198 

230,429 
497-318 

8o,is7 

100.0 

31.8 

19-4 
42.0 

6.8 

750 

1015 

318 
960 

394 

806,000 

373.000 

135,000 
246,600 

S3, 400 

100.0 

46.0 

17.0 
30.0 

7.0 

427 

1008 
186 

Civil  service 

Revenue     and    post- 
oflBce  service 

47S 
196 

Total  expenditures. 

188,622 

100. 0 

100 

1,184,102 

100. 0 

630 

808,000 

100. 0 

438 

w  Hansard,  April  30,  1919,  cols.  119,  120,  141.     See  also  memorandum  presented  by  the 
Chancellor,  October  23,  1919,  Cmd.  (376,  377),  revised  in  Cmd.  (379). 
London  Economist,  July  3,  1920,  p.  8,  and  April  24,  1920,  p.  856. 


8o  INTERNATIONAL   FINANCE   AND   ITS    REORGANIZATION 

The  above  table  shows  some  striking  facts.  A  comparison  of 
the  items  of  budget  revenue  shov/s  that  inland  revenue  constituted 
the  chief  source  of  revenue  in  each  of  the  three  years,  before  the 
war,  immediately  after  the  war  and  during  a  normal  post-war 
year.  This  consisted  of  income  and  excess-profits  taxes  chiefly,  and 
to  a  less  extent  of  inheritance  and  stamp  taxes,  the  land  tax  and 
house  and  land-value  duties.  Customs  and  excise  constituted  the 
second  largest  source  of  revenue  during  each  of  these  three  years. 

Of  the  expenditures  in  the  budget  the  army  and  navy  service 
represented  the  largest  percentage  of  any  item  in  the  pre-war 
budget.  In  1920-21  the  civil  service  represented  the  largest  per- 
centage of  expenditure,  and  in  a  normal  post-war  j'ear  the  consoli- 
dated fund  services  will  constitute  the  largest  percentage  of  expendi- 
ture. The  lowest  item  of  expenditure  in  each  of  the  three  years  is 
the  revenue  and  postoffice  service.  The  next  smallest  item  of 
expenditure  is  in  the  pre-war  year,  the  consolidated-fund  service, 
and  in  the  after  war  years  the  army  and  navy  service.  In  fact  the 
army  and  navy  service  in  1920-21  as  well  as  in  the  normal  post- 
war year  constitutes  so  small  a  percentage  of  the  total,  19  per  cent 
and  17  per  cent  respectively,  that  even  a  substantial  reduction  in 
the  army  and  navy  service  will  not  aiford  any  decided  help  in  the 
problem  of  balancing  the  budget.  Unless  revenue  can  be  materially 
increased,  and  this  is  doubtful,  the  chief  economies  will  have  to 
come  out  of  the  largest  item ;  the  service  of  the  debt  may  be  reduced 
by  refunding  at  a  lower  rate  of  interest. 

The  civil-service  expenditures  may  hardly  be  curtailed.  Among 
the  largest  items  are  education,  science,  art,  postoffice,  and  pensions 
and  insurance.    Few  of  these  can  be  greatly  reduced. 

A  comparison  of  the  relative  figures  in  the  table,  in  which  the 
191 3  figures  have  been  taken  as  a  base  of  100  shows  that  on  the 
revenue  side  the  largest  increase  was  in  inland  revenue,  chiefly  from 
the  income  and  excess-profits  taxes.  The  customs  and  excise  taxes 
show  the  second  largest  increase,  chiefly  on  a  limited  range  of  com- 
modities. The  increase  in  non-tax  revenues  is  without  significance, 
as  the  heavy  increase  for  1920-21  was  due  to  the  sale  of  miscel- 
laneous war  assets.  On  the  expenditure  side  of  the  budget,  by  far 
the  largest  increase  is  in  the  service  of  the  debt.  The  second  largest 
increase  is  in  the  civil  service. 


BRITISH   PUBLIC    FINANCE  8l 

if.  Meeting  the  Deficit 

(a)   Extent  and  Cause  of  the  Deficit — 

From  the  fiscal  year  191 5  through  the  fiscal  year  19 19  Great 
Britain  met  by  revenue  about  28  per  cent  of  her  total  expenditures. 
That  is,  there  was  a  deficit  of  about  72  per  cent  in  the  five  v^tlt 
budgets.  Domestic  and  foreign  loans  bridged  the  gap  between 
receipts  and  disbursements.  In  the  fiscal  year  1919-20  the  expendi- 
tures were  £1,665,773,000  and  the  revenues  only  £1,339,571,000, 
leaving  a  deficit  of  £326,202,000,  or  nearly  double  the  total  cost 
of  government  before  the  war.  This  deficit  would  have  been 
£622,633,000,  almost  twice  as  great,  but  for  the  fact  that  the 
sale  of  war  supplies  and  other  non-tax  revenues  yielded  £296,431,- 
000.  In  191 2-1 3  the  budget  practically  balanced.  In  1919-20 
the  receipts  were  38  per  cent  short  of  expenditures.  In  1920-21 
there  was  estimated  a  deficit  of  only  £95,952,000  or  8  per  cent 
of  expenditures  which  was  to  be  more  than  covered  by  sales  of 
war  supplies  and  by  other  non-tax  revenue  totaling  £330,150,000, 
leaving  an  estimated  net  credit  balance  of  £234,198,000  for  the 
reduction  of  the  debt,  which  at  the  end  of  the  year  was  actually 
a  budget  of  £230,557,000  surplus. 

The  cause  of  the  deficit  for  1919-20  was  said  by  Mr.  Chamber- 
lain to  be  the  continuance  of  military  expenditure  as  a  consequence 
of  the  delays  in  the  establishment  of  peace.  Again  large  expendi- 
tures for  the  fiscal  year  1920  were  incurred  on  account  of  subsidies 
for  bread,  coal,  and  the  railways.  The  bread  subsidy  cost  about 
£56,000,000,  the  coal  subsidy  about  £32,000,000,  and  the  railway 
subsidy  about  £53,000,000,  a  total  of  about  £141,000,000  for  the 
year.  These  charges  represented  concretely  the  cost  to  the  Govern- 
ment of  financing  the  war  by  inflation,  and  were  as  properly  a 
war  cost  as  interest  on  the  debt.  Other  factors  contributing  to 
creating  a  deficit  were  the  large  expenditures  on  pensions  and 
higher  pay  for  the  army  and  navy,  as  well  as  unemployment  doles 
and  other  after-war  expenditures. 

The  party  of  the  opposition  criticised  the  use  of  money  from 
the  sale  of  war  stores  to  balance  expenditures.  These  stores  were 
purchased  with  borrowed  funds  and  the  salvage  money  should  have 
been  credited  to  the  debt  and  not  to  the  revenue  account.  The 
use  of  these  funds  in  the  budget  was  compared  to  "the  sale  of  one's 
furniture  to  pay  the  rent." 


82  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

(b)    Wiping  Out  the  Deficit — 

To  meet  the  deficit  is  was  necessary  to  increase  revenues  and 
decrease  expenditures.  A  special  companies'  profits  tax  of  i  shilling 
in  the  pound,  that  is  5  per  cent,  was  to  be  levied  on  the  profits  of 
limited  liability  companies.  Other  increases  in  taxes  affected 
gasoline,  alcoholic  liquors,  and  cigars  and  there  is  to  be  a  lowering 
of  the  limit  of  income  at  which  super-taxes  become  effective.  Minor 
changes  in  taxation  covered  stamp  taxes,  telegram,  telephone,  and 
postal  rates. 

In  addition  to  broadening  the  basis  of  taxation  and  increasing 
the  volume  of  revenue  the  Exchequer  plans  to  effect  economies 
such  as  the  revision  of  railroad  rates  so  as  to  make  the  railroads 
self-supporting,  and  the  elimination  of  the  bread  subsidy  and  the 
unemployment  doles.^^  The  temporary  expenditures  arising  out  of 
the  war  such  as  land-settlement  loans,  railway  deficits,  donations 
to  ex-soldiers  for  training,  education,  resettlement,  and  unemploy- 
ment, and  other  small  items,  amounted  to  £182,000,000.  In  1920- 
21  there  have  been  reductions  from  the  1919-20  expenditures  of 
about  £374,000,0000  for  army  and  navy  services  and  about  £72,- 
000,000  for  the  civil  service. 

The  1920-21  budget  as  compared  with  the  1919-20  budget 
shows  a  reduction  of  29  per  cent  in  expenses,  from  £1,666,000,000 
to  £1,184,000,000,  and  an  increase  in  revenue  of  6  per  rent  from 
£1,340,000,000  to  £1,418,000,000.  As  a  result  the  deficit  of 
£326,000,000  in  1919-20  was  converted  into  a  credit  balance  of 
£234,000,000. 


iii.  Maturing  and  Floating  Debt 

Although  British  financing  in  the  war  was  sound  and  conserva- 
tive (about  25  per  cent  of  the  loans  were  short-term  and  75  per 
cent  were  long-term),  the  question  of  handling  the  floating  debt 
is  a  serious  one.  At  the  end  of  the  year  191 9  about  £1,500,- 
000,000  of  the  British  debt  was  due  within  the  year.  The  budget 
for  1920-21  was  expected  to  have  a  balance  of  about  £234,000,000 
available  for  the  reduction  of  the  debt. 

"  Report  of  Select  Comraitee  on  National  Expenditures  for  1920.  House 
of  Conunons  papers,  113,  142,  168,  238,  245. 


BRITISH    PUBLIC    FINANCE  83 

The  classification  of  the  pubh'c  debt  by  maturities  follows: 

National  Debt  of  Great  Britain  as  of  December  31,  1919 
(in  million  pounds  sterling) 


Per  cent  of 
grand  total 

Due  within  one  year: 

Ways  and  Means  advances 

245.2 

1106.6 

160.3 

51-4 

Treasury  bills 

Exchequer  bonds 

Anglo-French  loan 

Victory  bonds 

Total 

1566. 5 

146.4 

20.1 

8.2 

267.3 

48.5 

867.4 

329.8 

19-39 

Due  within  five  years: 

Exchequer  bonds 

Victory  bonds 

Annuities 

War  savings  certificates 

Debt  in  United  States 

Debt  due  to  United  States  Government 

Other  debt  due  foreign  nations  and  dominions 

Total .  .           

1687.7 

16.6 

334-4 

1508.8 

2122.6 

60.0 

409.1 

20.89 

Due  in  five  to  sLxty  years : 

E.xchequer  bonds 

National  war  bonds 

War  loans .        

Debt  in  United  States 

Funding  loan 

Total 

4451-5 

II. 8 

301-4 

II. 0 

2.6 

55-1 

Perpetual : 

Annuities  for  life  and  term  of  years 

Debts  due  to  Bank  of  England 

Debts  due  to  Bank  of  Ireland 

Total 

326.8 

46.  2 
8078.7 

4.04 

0-S7 
ICO  00 

Miscellaneous: 

Other  capital  liabilities 

Grand  total 

84  INTERNATIONAL    FINANCE    Am)   ITS    REORGANIZATION 

The  Treasury  attempted  to  reduce  the  floating  debt  at  the  time 
of  the  issue  of  the  Funding  Loan  and  Victory  Bonds  in  1919. 
The  nominal  amount  offered  was  £575,000,000.  Of  the  total  the 
banks  subscribed  £110,000,000.  Hartley  Withers  pointed  out  the 
difficulty  of  handling  the  floating  debt  after  this  attempt  at  funding 
it.  In  a  pessimistic  mood  he  said  "the  funding  operation  has  been 
an  almost  complete  failure  and  the  only  prospect  that  appears  to 
lie  before  the  government  is  one  of  continuing  to  finance  by  treasury 
bills  or  ways  and  means  advances  or  by  any  other  kite-flying  method 
by  which  they  can  appear  to  make  both  ends  meet." 

The  floating  debt  must  either  be  funded  or  paid  off.  At  present 
it  can  be  funded  only  at  a  high  rate  of  interest,  for  only  the  reduc- 
tion in  the  floating  debt  makes  it  possible  to  reduce  the  rate  of 
interest.  Unless  the  government  has  a  surplus  of  revenue  over 
expenditure,  the  alternatives  are  either  to  issue  new  treasury  bills 
to  meet  those  maturing  or  else  to  resort  to  further  inflation  through 
ways  and  means  advances.  The  sound  way  of  liquidating  the 
floating  debt  is  to  raise  cash  either  through  taxation  or  through  the 
sale  of  war  savings  certificates.  The  continued  sale  of  war  savings 
certificates,  the  Drummond-Fraser  plan  of  issuing  bonds  con- 
tinuously in  small  lots,  may  offer  a  solution  to  the  problem  of 
handling  the  floating  debt.  Such  a  solution  would  be  sound 
because  it  would  involve  continued  saving  by  the  people,  the  only 
method  by  which  the  fiscal  problems  of  the  belligerents  may  be 
met.  The  Treasury  bonds  sold  in  1920  were  aimed  to  fund  the 
treasury  bills.  They  were  to  bear  j4  per  cent  higher  rate  than 
the  bills,  until  1925,  but  only  5  per  cent  thereafter,  and  were 
redeemable  by  the  holder  upon  one  year's  notice. 

At  the  end  of  April,  1921,  an  attempt  was  made  to  refund 
maturing  National  War  bonds  by  means  of  a  3^/2  per  cent  Con- 
version loan  maturing  in  1961  and  convertible  at  the  rate  of  £166 
per  £100  of  National  War  bonds.  In  spite  of  the  high  yield 
offered,  about  5.7  per  cent,  for  40  years,  the  funding  scheme  was 
a  failure.  Of  £632  million  of  War  bonds  maturing  by  Septem- 
ber, 1923,  which  had  the  option  of  conversion,  only  £148  million 
were  offered  up  to  the  beginning  of  June,  192 1,  an  amount  hardly 
sufficient  to  retire  the  £198  million  of  National  War  bonds  matur- 
ing October  I,  1922. 

On  July  5,  1 92 1,  the  Chancellor  of  the  Exchequer  offered  for 
sale  "on  tap"  and  without  limit  as  to  amount,  a  new  issue  of  5J^ 


BRITISH    PUBLIC    FINANCE  8$ 

per  cent  Treasury  bonds  at  97,  maturing  April  I,  1929,  and  con- 
vertible up  to  October  i,  1922,  at  par  into  £146  of  3^  per  cent 
Conversion  loan.  The  results  were  unsatisfactory.  By  August  3, 
192 1,  only  £89  million  of  new  Treasury  bonds  were  issued  in  ex- 
change for  National  War  bonds  and  Exchequer  bonds,  £52  mil- 
lion only  of  the  latter  being  converted  out  of  a  total  of  £72  mil- 
lion, maturing  October,  1921.  In  the  words  of  the  editor  of  the 
Statist,  "If  the  new  loan  proves  a  failure,  and  if  current  expenditure 
is  not  drastically  reduced,  we  may  expect  an  increase  in  Treasury 
bills  and  Ways  and  Means  Advances  during  the  current  financial 
year  of  something  like  200  millions." ^2 

E.  An  Appraisal  of  British  War  Finance 

In  the  light  of  the  experience  of  the  belligerents  it  is  possible 
to  appraise  the  theories  of  war  finance  advocated  by  economists 
and  the  policies  followed  by  the  several  governments.  The 
standards  by  which  the  policies  of  war  financing  are  to  be  judged 
relate  to  the  difficulty  in  raising  funds,  the  need  for  changing  the 
fiscal  policy,  the  distribution  of  the  burden  with  respect  to  ability 
to  pay,  and  the  outlook  for  the  future. 

i.  Availability   of  Funds 

Great  Britain  was  able  to  finance  her  allies  as  well  as  herself. 
Her  financial  policy  made  it  possible  to  lend  to  her  co-belligerents 
22  per  cent  of  the  total  amount  of  the  British  debt  at  the  end  of 
the  war.  As  an  offset  the  borrowings  from  the  United  States 
Government  were  only  1 1  per  cent  of  the  total  British  war  debt. 
British  credit  held  out  for  almost  three  years  until  America  assumed 
the  burden  of  the  weak  Allies. 

(a)  Moderate  Rise  of  Interest  Rates  on  War  Securities — 

As  the  demand   for   funds  increased,   interest   rates  rose.     In 

1914  treasury  bills  were  sold  at  a  yield  of  3^  per  cent  and  in 

191 5  the  rates  ranged  from  2^  per  cent  for  three-months  bills 
to  3%  per  cent  for  nine-months  bills.  In  191 6  treasury  bills  were 
offered  not  at  a  fixed  published  rate  but  on  the  old  competitive  or 

"  Statist,  April  30,  June  4,  July  9,  and  August  6,  1921,  pp.  740,  1037, 
4<  and  328. 


86  INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

tender  basis  and  the  rates  were  approximately  4^4  to  5  per  cent.^' 
In  191 7  when  the  fixed  rate  basis  was  restored,  the  rates  ranged 
from  4^  per  cent  on  three-months  bills  to  4^^  per  cent  on  nine- 
months  bills.  The  rates  on  exchequer  bonds  increased  likewise. 
In  19 14  3  per  cent  exchequer  bonds  were  sold  on  the  sjstem  of 
tendering  to  yield  3.18  per  cent.  In  1915  the  fixed  rate  was  5 
per  cent.  In  1916  the  rate  was  raised  to  6  per  cent  in  order  to 
deflect  new  money  from  treasury  bills  to  longer  term  exchequer 
bonds.  The  rise  in  the  rates  on  exchequer  bonds  caused  the  decline 
in  the  quotations  of  all  outstanding  securities.  In  19 1 7  the  rate 
was  lowered  to  5  per  cent.^* 

The  rates  on  long-term  loans  rose  with  the  increase  in  the 
volume  outstanding  and  the  demands  for  funds  continuous. 
The  first  loan  in  191 4  was  issued  at  95,  at  a  rate  of  interest  of 
3^  per  cent  and  a  yield  of  4  per  cent.  In  191 5  the  second  loan 
was  put  out  at  par,  and  at  a  rate  of  interest  of  4^^  per  cent.     In 

1916  the  taxable  form  of  the  loan  was  issued  at  95,  at  a  rate  of 
interest  of  5  per  cent  and  a  yield  of  about  5.34  per  cent.     The 

19 1 7  loan  was  put  out  at  par  and  at  a  rate  of  interest  of  5  per 
cent,  but  payable  at  a  premium  so  that  the  yield  was  about  5.36 
per  cent.  This,  the  fourth  war  loan,  was  issued  under  the  Drum- 
mond-Fraser  plan  of  continuous  borrowing.  The  tax-exempt  issues 
of  the  third  and  fourth  loans  were  issued  at  par  and  at  a  rate  of 
interest  of  4  per  cent. 

The  foreign  loans  placed  in  1 91 5  and  1 91 6  in  the  United 
States  were  issued  at  around  98,  bore  interest  at  5  per  cent,  and 
yielded  5.5  per  cent.  The  last  private  foreign  loan  placed  in  the 
United  States,  in  191 7,  bore  interest  at  5^  per  cent  and  yielded 
6  per  cent. 

The  proof  of  the  soundness  of  British  war  finance  lies  In  the 
fact  that  the  rate  of  interest  for  funds  did  not  rise  greatly.  The 
restriction  on  new  capital  issues  was  an  important  factor  but 
secondary  to  the  strength  of  British  credit  in  keeping  down  the 
rates  of  interest.  The  slight  premiums  upon  redemption  of  the 
loans  and  the  slight  discount  at  issue  were  not  indications  of 
weakened  credit  but  merely  convenient  means  of  increasing  slightly 
the  yield  of  the  bonds.  With  the  exception  of  the  United  States, 
Australia,  New  Zealand  and  India,  which  issued  war  bonds  exclu- 

"  Industry  and  Finance,  p.  246. 
^*Ibid.,  p.  250. 


BRITISH    PUBLIC    FINANCE  87 

sively  at  par,  the  belligerents  either  sold  bonds  at  a  discount  or 
agreed  to  redeem  them  at  a  premium.  This  practice  should  not 
at  all  be  taken  as  an  evidence  of  impaired  credit. 

After  America  entered  the  war  British  credit  was  strengthened 
so  that  the  terms  of  the  sixth  war  loan  were  not  more  favorable 
than  those  of  the  preceding.  It  carried  no  higher  price  of  issue 
or  of  redemption  than  the  previous  loans  and  in  addition  purchasers 
were  deprived  of  the  privilege  of  converting  into  past  or  future 
war  loans. 

(b)   No  Lottery  Loans  Issued — 

Although  some  of  the  belligerents  in  financial  straits  resorted 
to  lotteries  to  raise  money,  Great  Britain  maintained  her  traditions 
of  strength.  The  proposal  had  been  agitated  during  the  war  and 
was  referred  to  a  select  committee  of  the  House  of  Commons  in 
1918.  The  proposal  was  to  issue  a  4  per  cent  tax-exempt  loan 
of  which  the  subscribers  would  receive  2^  per  cent  in  interest 
and  the  other  ij^  per  cent  would  be  put  into  a  pool  from  which 
would  be  drawn  prizes  ranging  from  £1  to  £1,000.  British 
publicists  were  in  decided  opposition  to  the  plan.  They  con- 
tended that  the  bonds  would  be  a  national  investment  with  regard 
to  five-eighths  of  the  interest  and  a  lottery  with  regard  to  the 
rest,  and  that  the  Lottery  Act  in  effect  for  one  hundred  years 
would  have  to  be  repealed  or  suspended,  and  that  the  British 
Chancellor  of  the  Exchequer  would  become  a  lottery  manager, 
and  the  Treasury  would  be  converted  into  a  gambling  house. 

"As  if  the  gambling  spirit  were  not  rife  enough  in  the  country 
the  state  would  foster  it  by  giving  it  the  seal  of  its  approval  and 
would  carry  on  an  active  propaganda  to  urge  all  classes  to  join 
the  speculation.  It  would  encourage  people  to  get  rich  not  by 
work  but  by  hazard  and  it  would  urge  them  to  accept  its  offer 
on  the  ground  of  patriotic  duty.  It  is  not  surprising  that  the  chair- 
man of  the  War  Savings  Committee  bitterly  denounced  the  pro- 
posal as  the  destruction  of  the  work  on  which  his  vast  organization 
was  engaged."  ^^ 

The  proposal  was  defeated  in  the  House  of  Commons  on  De- 
cember I,  1919,  by  an  overwhelming  vote,  276  to  84. 

"  Samuel,  Herbert.  The  Plight  of  the  Taxpayer.  Contemporary 
Review,   December,    1919. 


88  INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 


ii.  Fiscal  Policy  Unchanged  Throughout  the  War 

One  test  of  a  policy  of  war  finance  is  the  necessity  of  abandon- 
ing it  when  it  breaks  down.  The  experiences  of  the  United  States 
in  the  War  of  1812  and  in  the  Civil  War  and  of  France  and  of 
Germany  in  the  World  War  were  evidences  of  wrong  fiscal  policies. 
Great  Britain,  however,  adhered  to  a  defined  and  fairly  consistent 
policy  throughout  the  war.  A  large  percentage  of  her  expenses 
was  met  by  taxation.  The  loan  policy  involved  the  use  of  waj's 
and  means  advances,  that  is,  loans  from  the  Bank  of  England, 
when  funds  were  needed  quickly.  Treasury  bills  running  for  a 
few  months  and  exchequer  bonds  running  for  a  few  years  were 
used  to  refund  ways  and  means  advances.  They  were  also  used 
in  anticipation  of  long-term  loans,  the  preparations  for  which  lasted 
months  and  therefore  compelled  the  use  of  short-term  funds  in 
the  interval.  Finally  when  long-term  loans  could  not  be  raised  at 
favorable  terms,  treasury  bills  were  sold  at  home  and  abroad  with 
intention  of  renewing  them  at  maturity.  The  floating  debt  con- 
stitutes an  embarrassing  problem,  for  bills  often  mature  wdien 
money  is  tight  and  must  be  renewed  at  rising  rates.  Foreign 
loans  were  raised  in  the  United  States,  Japan,  Argentina  and 
elsewhere  from  191 5  onward  throughout  the  war.  The  utilization 
of  the  credit  reserves  of  the  United  States  upon  her  entry  into 
the  war  relieved  the  British  treasury  of  the  need  to  resort  to  open- 
market  borrowing  at  ever-increasing  rates. 

Taxation  was  vigorous  and  increasingly  heavy  throughout  the 
war.  Not  only  was  the  interest  on  loans  fully  covered,  but  a  large 
percentage  of  the  war  expenditures  was  met  out  of  taxation.  The 
percentage  of  taxes  to  expenditures  increased  from  191 6  through 
1919.  Direct  taxes  constituted  the  chief  source  of  funds.  These 
are  democratic  in  character  and  not  easily  shifted.  The  income 
and  excess-profits  taxes  produced  over  60  per  cent  of  the  total 
tax  revenues.  The  number  of  sources  of  tax  revenue  were  few. 
The  rates  on  most  of  these  were  gradually  and  continually  raised 
throughout  the  war.  A  notable  change  in  the  tax  policy  was  the 
introduction  late  in  the  war  of  luxury  and  consumption  taxes  the 
purpose  of  which  was  primarily  to  repress  non-essential  consump- 
tion, rather  than  to  raise  revenue. 


BRITISH   PUBLIC    FINANCE  89 


ill.  Democratic  versus  Militaristic  Finance 

The  British  policy  was  characterized  not  only  by  financial 
prudence  but  also  by  political  sagacity.  The  heavy  reliance  on 
taxes  reduced  the  evils  of  inflation  which  bear  most  heavily  upon 
the  class  living  at  the  margin  of  existence,  earning  just  enough  to 
maintain  life.  The  vigorous  tax  policy  prevented  the  cost  of  living 
from  rising  rapidly  in  England  as  it  did  in  the  countries  that  used 
loans  or  note  issues  more  extensively,  such  as  France,  Germany, 
and  Italy.  Direct  taxes,  the  income  and  excess-profits  tax,  are 
not  easily  shifted  and  can  be  adapted  to  bear  in  accordance  with 
the  capacity  to  pay.  Britain  used  these  chiefly.  The  Continent 
relied  on  indirect  taxes,  which  raised  the  cost  of  living  because 
they  were  shifted  to  the  consumer.  In  their  incidence  indirect 
taxes  usually  press  most  heavily  upon  those  least  able  to  pay.  With 
conspicuous  political  sanity,  the  British  did  not  neglect  taxation 
in  the  hope  of  an  indemnity  as  the  Germans  did  or  in  the  hope  of 
complete  reparation  for  damages  as  the  French  did,  Britain  fol- 
lowed a  politically  democratic  and  an  economically  self-reliant  tax 
policy. 

Iv.   The  Outlook 

(a)   A  Retrospect — 

It  may  seem  alarming  that  the  expenditures  of  the  six  years 
from  April  i,  191 4,  to  March  31,  1920,  £11,268,000,000,  were 
greater  than  the  expenditures  of  the  226  years  from  1688  to  19 14, 
which  amounted  to  £10,944,000,000,  However,  an  historical 
comparison  is  reassuring.  The  English  public  debt  in  1727  was 
£52,000,000,  in  1 81 7,  £839,000,000,  and  in  1919  £8,078,000,000. 
In  the  90  years  preceding  the  close  of  the  Napoleonic  War  the 
English  public  debt  increased  15.65  times  and  in  the  102  years 
prior  to  the  end  of  the  Word  War  it  increased  only  9.62  times. 

The  World  War  led  to  a  tremendous  increase  in  the  public 
debt.  But  so  did  the  Napoleonic  Wars.  The  first  ten  years  of 
the  Napoleonic  Wars  caused  an  expenditure  greater  than  the  51 
years  of  peace  of  the  preceding  century.  And  the  second  15  years 
of  the  Napoleonic  Wars  occasioned  an  expenditure  twice  as  great 
as  the  51  years  of  peace  which  prevailed  during  the  period  from 
1698  to  1792. 


go 


INTERNATIONAL   FINANCE    AND    ITS    RE0RGANI2ATI0N 


Expenditures  of  the  Napoleonic  Wars  and  of  the  Century  Preceding  " 
(in  million  pounds  sterling) 


Years 


1698-1701 
1702-1714 
1715-1739 
I 740-1 749 
1750-1755 
1756-1766 
1767-1775 
1776-1785 
1786-1792 

Total .  . 


Period 


1793-1802 
1803-1 81 7 


Peace 

Wars  of  Ann 

Peace 

Spanish-Austrian  Wars . 

Peace 

Seven  Years'  War 

Peace 

American  War 

Peace 


First  part  of  Napoleonic 
W^ars 

Second  part  of  Napoleon- 
ic \\' ars 


Peace 


Number 
of  years 


SI 


Amount 
spent 


IS 
142 

39 

89 

116 


402.6 


War 


Number 
of  years 


13 
10 
II 
10 


44 

ID 
15 


Amount 
spent 


98.8 

9S-0 

IS9-S 

218.0 


571-3 

454 -o 
805.0 


A  comparison  of  the  wealth  and  debt  of  Great  Britain  at  the 
end  of  the  Napoleonic  Wars  and  at  the  beginning  of  the  World 
War  will  indicate  the  probable  outlook  after  the  World  War.  In 
a  century  the  population  of  Great  Britain  increased  2.7  times  and 
the  national  wealth  increased  5.3  times.  In  spite  of  three  wars 
during  the  nineteenth  century  the  debt  of  Great  Britain  at  the 
beginning  of  the  World  War  was  only  0.84  as  great  as  at  the 
end  of  the  Napoleonic  Wars.  The  national  income  in  the  century 
following  the  Napoleonic  Wars  increased  5.2  times  and  debt 
charges  decreased  to  0.77  of  the  amount  at  the  end  of  the 
Napoleonic  Wars.  During  the  World  War  the  British  public  debt 
increased  about  elevenfold  and  the  debt  charged  increased  about 
twelvefold.  The  difference  between  the  changes  in  the  public  debt 
and  in  the  debt  charges  is  due  to  the  fact  that  in  the  century 
following  the  Napoleonic  Wars  refunding  operations  reduced  debt 
charges  faster  than  the  debt  and  during  the  World  War  the  rise 
of  interest  rates  increased  the  debt  charges  more  rapidly  than  the 
debt. 

"Hirst,  F.  W.,  Credit  of  the  Nations,  pp.  19,  20.  See  also  Fisk,  Harvey 
E.,  English  Public  Finance,  p.   38. 


BRITISH   PUBLIC    FINANCE 


91 


Weaxth  and  Debt  of  Great  Britain 


Popu- 
lation, 
millions 

National 
wealth, 
million 
dollars 

National 
debt, 
million 
dollars 

Debt  per 
capita. 
Dollars 

Debt  as 
percent- 
age of 
wealth 
per  cent 

Relative  Figures 
(181 7  figures  =  100) 

Popu- 
lation 

National 
wealth 

National 
debt 

At  end  of  Napo- 
leonic  Wars 
(1817) 

At  beginning  of 
World  War 
(1914) 

At  end  of  World 
War  (19x9).... 

17 

46 
46 

13,100 

69,600 
69,600* 

4.130 

3,458 
37,6S7 

243-30 

7S03 
817.04 

31S 

4-97 
54  10 

100 

270 
270 

100 

53° 
530 

100 

84 
911 

*  It  is  assumed  that  the  pre-war  and  post-war  wealth  are  the  same,  that  the  new  plants 
erected  are  equivalent  in  value  to  property  destroyed.  F.  W.  P.  Lawrence  in  his  Levy  on 
Capital,  p.  41,  assumes  a  net  loss  of  about  10  to  15  per  cent.  Harvey  Fisk  in  his  English  Public 
Finance,  p.  37,  assumes  that  the  wealth  of  Great  Britain  increased  66  per  cent  during  the  war. 
This  is  undoubtedly  an  error. 


National  Income  and  Debt  Ch.arges 

OF  Great  Britain 

National 
income, 
million 
dollars 

Debt 

charges, 
million 
dollars 

Debt  Charges, 

Relative 
Figures 

Per 

Capital 

Per  Cent 

of 

Income 

National 
income 

National 

debt 
charges 

At  end  of  Napoleon- 
ic Wars  (181 7) .  .  . 

At  beginning  of 
World  War  (19 14) 

At  end  of  World  War 
(1919) 

1,944 
1 1 ,000 
1 1 ,000 

155 

119 

1421 

9.10 

2.58 

30.83 

8.0 

1.08 

12.92 

100 

515 
515 

100 

77 
916 

(b)    The  Prospect— 

Even  the  economists  who  advocated  the  capital  levy  or  the  war- 
wealth  levy,  because  the  burden  of  debt  charges  is  so  heavy  im- 
mediately after  the  war,  admitted  that  over  a  long  period  of  years 
the  new  financial  burden  would  be  borne  as  easily  as  the  relatively 
gigantic  debt  of  the  Napoleonic  Wars  was  borne  after  a  genera- 
tion following  its  close.  The  quotation  from  Macaulay  of  the 
wailing  of  the  publicists  about  the  unbearable  debts  of  previous 
wars,  may  be  recalled  here.  "On  what  principle  is  it  that  when 
we  see  nothing  but  improvement  behind  us  we  ought  to  expect 
nothing  but  deterioration  before  us?  The  prophets  of  evil  were 
under  a  double  illusion.     They  made  no  allowance  for  the  eflfect 


92  INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

produced  by  the  incessant  progress  of  every  experimental  science 
and  by  the  incessant  efforts  of  every  man  to  get  on  in  life.  They 
saw  the  debt  grow  but  they  forgot  that  other  things  grow  as  well 
as  the  debt.  They  greatly  overrated  the  pressure  of  the  burden. 
They  greatly  underrated  the  strength  by  which  the  burden  was  to 
be  borne." 

One  of  the  factors  that  may  make  the  burden  of  the  debt 
greater  is  deflation,  that  is,  an  increase  of  commodities  in  terms 
of  the  monetary  units.  An  increase  of  the  production  of  goods 
faster  than  of  gold  or  credit  may  make  the  burden  heavier.  But 
to  the  extent  that  business  profits  increase  and  are  applied  to 
the  repayment  of  the  debt,  increased  production  will  make  the 
burden  lighter.  Furthermore,  deflation  means  lower  prices,  and 
ultimately  lower  rates  of  interest.  Therefore  conversion  or  refund- 
ing of  the  debt  may  reduce  the  burden  pari  passu  with  the  increase 
in  the  purchasing  power  of  money,  taxes  and  interest.  The  factors 
making  the  load  lighter  would  be  an  increase  in  the  gold  output 
or  of  the  use  of  credit  instruments,  or  of  the  velocity  of  circulation. 
This  is  the  gradual,  continuous  and  historic  process  of  inflation 
under  the  influence  of  which  prices  rise. 


CHAPTER  III 

FRENCH  PUBLIC  FINANCE  ^ 

A  Pre-War  Situation 

The  French  public  debt  was  handled  with  difficulty  even  in 
the  eighteenth  century.  Except  for  Colbert  and  Turgot,  who 
enforced  a  vigorous  reduction  of  the  debt  and  of  debt  charges,  the 
French  Ministers  of  Finance  favored  the  policy  of  borrowing. 
The  French  Revolution  was  in  large  part  due  to  the  methods  of 
financial  administration.-  After  the  Franco-American  War  an 
ambitious  program  of  public  works  added  to  the  national  debt. 
For  a  decade  from  i88i,  the  budget  did  not  balance  and  loans 
were  issued  to  meet  the  deficit.  The  extra-budgetary  expenses  in 
this  decade  exceeded  fr.  5,000  million.     From  1871   to  1918  the 

'  Official  Sources: 

Annuaire  statistique.     Statistique  generale  de  la   France. 
Bulletin  de  la  statistique  generale  de  la  France.     (Quarterly.) 
Budget  generale  de  la  France.      (Annual.) 
Expose  de  motifs  du  projet  de  loi    (of  the  Revenue  Laws). 
Bulletin  de  statistique  et  de  legislation  comparee.     (Monthly.) 
Journal  officiel : 

Senat  debats  et  documents. 

Chambre  des  deputes  debats  et  documents  (Speeches  of  Ministers  of 
Finance  Ribot,  1915-16;  Klotz,  1917-19,  Fran^ois-Marsal,   1920, 
Doumer,  1921). 
Rapports  generaux  du  commission  de  la  budget,  Senat  et  Chambre. 
The   report   of   the   Budget   Committee   of  the   Chamber    (1919,    1918) 
contained   beside   the   budget    (i)    an   official   history   of    French   finances 
since  August,    1914,    (2)    a   study  of  the   war  finances   of  ♦he   other   bel- 
ligerent,   (3)   war  time  history  of  the  foreign  exchanges  on  the  various 
financial   centers. 

Semi-official  Sources: 

Bulletin  de  la  societ6  d'economie  politique. 

L'Economiste  frangais. 

L'Economiste  europeen. 

Revue  de  science  et  de  legislation  financieres. 

Revue  politique  et  parlementaire. 

Gomel,  Causes  Financieres  de  la  Revolution  Frangaise. 
Stourm,  Lcs  Finances  de  L'Ancien  Regime  et  de  la  Revolution. 

93 


94 


INTERNATIONAL    FINANCE    ANT)    ITS    REORGANIZATION 


public  debt  increased  from  13,000  to  31,000  million,  and  of  an 
increase  in  revenue  of  fr,  1,286  million,  71  per  cent  was  absorbed 
by  increased  charges  on  the  debt.  The  existence  of  a  large  and 
diffused  public  debt  was  regarded  as  an  advantage  to  the  state. 
Owing  to  the  lack  of  a  surplus  of  revenue  over  expenditure,  the 
government  could  not  maintain  an  effective  sinking  fund.  At 
several  intermittent  periods  in  the  nineteenth  century,  a  nominal 
sinking  fund  was  inaugurated,  but  it  produced  little  tangible 
result.  The  reduction  of  debt  charges  was  accomplished  by  con- 
versions of  a  large  part  of  the  debt  from  5  per  cent  in  1883  to  3 
per  cent  in  1902.^ 

French  finances  in  191 4  were  not  in  a  condition  to  stand  the 
strain  of  a  war.  The  per  capita  debt  in  France  was,  by  a  wide 
margin,  the  largest  in  the  world,  twice  that  of  Great  Britain, 
five  times  that  of  Turkey,  six  times  that  of  Russia,  eight  times 
that  of  Japan,  ten  times  that  of  Germany,  and  fifteen  times  that 
of  the  United  States. 

Debt  per  Capita  in  1914 


France 

Belgium 

Austria 

Italy 

Great  Britain 

Turkey 

Russia 

Japan 

Germany. .  .  . 
United  States 


$1 


66.20 
94.28 
84.99 
82.  SS 
75.03 
31 -35 
27-95 
21.74 
17.18 

^^33 


For  several  years  prior  to  191 4  France  had  been  wrestling 
with  the  problem  of  her  peace-time  budget.  In  the  attempt  to 
balance  it,  she  had  introduced  an  income  tax  and  a  tax  on  securities 
which  was  bitterly  opposed  by  large  investors  and  bankers  and 
their  press.     Further,  in  order  to  meet  current  expenses,  she  found 


•Hirst,  F.  W.,  The  Credit  of  Nations.     Report  of  National  Monetary 
Commission,  Washington:  Government  Printing  Office,  1910. 
Bastable,  C.  F.,  Public  Finance. 

Leroy  Beaulieu,  P.  Traite  de  la  Science  des  Finances. 
Le  Tresor  de  la  Rocque,  Les  Finances  de  la  Republique. 
Say,  Leon,  Les  Finances  de  la  France. 


TRENCH   PUBLIC    FINANCE 


95 


it  necessary  to  float  a  3^  per  cent  loan  of  900  million  francs  to 
cover  expenses  in  Morocco,  and  pay  the  cost  of  increasing  her  fleet 
and  of  carrying  out  the  three-year  military-service  law. 

The  basic  caiise  of  the  poor  fiscal  condition  of  France  was  the 
policy  of  maintaining  a  large  perpetual  debt.  The  French  debt 
increased  forty-eight  fold  from  1800  to  19 14.  On  the  other 
hand  the  debt  of  Great  Britain  increased  only  two  fold  in  the 
same  period.  No  other  country  in  the  world  showed  an  increase  at 
all  comparable  with  that  of  France.  In  fact  the  British  debt  at 
the  beginning  of  the  World  War  was  only  678  million  pounds 
sterling  as  compared  with  861  millions  at  the  end  of  the  Napo- 
leonic Wars. 

Growth  of  Public  Debt  in  France  * 
(in  million  dollars) 


Date 

Debt 

1800 

138.7 

181S 

247.7 

1848 

1,150.9 

1871 

2,423-5 

1912 

6,336.2 

July  31,  1914 

6,652.5 

Jan.    I,  1919 

28,702.6 

July    I,  1920 

53,200.0 

The  burden  of  a  large  debt  and  the  lack  of  a  broad  and  expan- 
sible basis  of  taxation  are  the  two  factors  which  determined  the 
manner  in  which  France  financed  the  war  and  which  in  large 
part  explain  the  difficulty  in  which  France  finds  herself  after  the 
war. 

B.  Loans 

i.  Cost  of  the  War^ 

The  cost  of  the  war  for  six  years  from  August  i,  1914  was 

over  fr.  233,CX)0  million.     The  highest  annual  cost  was  reached 

in  1918,  but  it  did  not  decline  much  in  the  two  following  years. 

About  20  per  cent  was  raised  from  current  non-loan  revenue  during 

'Statesmen's  Year  Book,  1919;  1920  figures  from  M.  Doumer's  report 
for  Finance  Commission  of  the  French  Senate,  Doc.  Pari.     Senat,  1920, 

p.  344. 

*The  best  exposition  of  the  war  finances  of  France  is  contained  in  the 
address  of  M.  Klotz  to  the  Chamber,  December  29,  1919,  Journal  Officiel, 
Charabre,   p.   5400,   and  in  the   advance  report  of   M.  Andre  Lefevre  to 


96 


INTERNATIONAL    FINANCE   AND   ITS   REORGANIZATION 


the  six  years,  but  up  to  the  end  of  1918,  only  15.5  per  cent  was 
so  raised.  As  a  result  of  an  increase  in  taxation  after  the  war, 
this  ratio  rose.  Advances  by  the  Bank  of  France  constituted  an 
important  source  of  funds,  13.7  per  cent  up  to  the  end  of  1919 
and  II. 7  per  cent  up  to  the  middle  of  1920.  Loans  constituted 
the  chief  reliance  of  the  French  Treasury  during  the  war  and 
furnished  68.8  per  cent  of  the  total  receipts,  up  to  the  middle  of 
1920.  The  two  loans  issued  during  1920  made  it  possible  to 
fund  a  considerable  part  of  the  floating  debt. 

According  to  M.  Paul  Doumer,  the  reporter  of  the  Finance 
Committee  of  the  Senate,  the  war  expenditure  of  France  from 
August  I,  1914  to  July  31,  1920  was  fr.  233,300  million.® 

War  Expenditures  of  Fr-ance 


Period 


Amount 
(in  million  francs) 


Per  cent 


1914  (s  months) 

191S 

1916 

1917 

1918 

1919 ^• 

1920  (7  months) 

Total 


6,590 
22,805 

32.945 
41,680 

54.537 
49,029 

25.714 


2.8 

9.8 

14.1 

17-8 

234 

21. 0 
II  .  I 


233.300 


SotTRCES  OF  Revenue 


Items 


Amount 
(in  million  francs) 


Per  cent 


Taxes  and  monopolies 

Bank  advances 

National  loans , 

Treasury  bills 

Foreign  loans 

Total 


43.300 
26,000 
72,000 
46,000 
35. 000 


222,300 


the  Chamber,  Journal  OfficicI,  December  26,  1919,  pp.  15,  144,  ft  seq. 
See  Revue  dc  Science  ct  de  Legislation  Financiere,  1919,  xvii:  4,  529-613; 
Les  Finances  de  Guerre  de  la  France. 

For  a  concise  presentation  see  F.  M.  Williams,  French  War  Finance. 
Federal  Reserve  Bulletin,  February,  1921,  pp.  174-181. 

•journal  Officiel,  Senat,  July  19,  1920.  For  figures  to  the  end  of  1919, 
see  address  of  M.  Klotz,  ibid. 

See  also  Rapport  General,  Chambrc,  1919;  No.  6158,  pp.  16-24,  37,  4a 


FRENCH    PUBLIC   TINANCE 


97 


ii.  Analysis  of  the  Public  Debt 

(a)    Growth  of  the  Debt  Analyzed — 

Analysis  of  the  growth  of  the  debt  of  France  indicates  that 
increasing  reliance  was  placed  on  foreign  loans  and  that  a  large 
percentage  of  the  annual  increase  in  debt  was  of  short-term 
character.  In  the  following  table  the  United  States  government 
advances,  although  they  are  demand  obligations,  are  considered  as 
long-term  debts.  Bank  advances  are  grouped  with  short-term 
loans.  Internal  loans,  long-term  or  short-term,  even  if  held  by 
foreigners,  are  considered  as  domestic  loans. 

Classification  of  Annual  Borrowings  by  Percentages  * 


Items 

1914 

1915 

1916 

1917 

Domestic  short-term 

96.6 
3-4 

42.7 
55-3 

588 
20.4 

55-5 
18.8 

Domestic  long-term 

Total  domestic  .  . . 

100. 0 

* 
0.00 

98.0 

2.0 
0.0 

79.2 

15-1 
5-7 

74-3 

9.6 
16  I 

Foreign  short-term 

Foreign  long-term 

Total  foreign 

0.00 

96.6 
3-4 

2.0 

44-7 
55-3 

20.8 

73-9 
26.1 

25-7 

65.1 
34-9 

Total  short-term 

Total  long-term 

*Foreign  debt  does  not  include  about  fr.  60,000,000  treasury  bills  sold 
in  London  and  fr.  41,000,000  sold  in  New  York,  nor  about  fr.  200,000,000 
of  the  first  internal  loan,  subscribed  abroad. 


(b)   Analysis  of  the  Total  Debt — 

An  analysis  of  the  total  debt  up  to  January  i,  1919,  indicates 
that  about  21  per  cent  of  France's  borrowings  were  external  and 
about  79  per  cent  internal.  On  the  other  hand  about  56  per  cent 
of  the  debt  was  in  long-term  bonds  and  about  44  per  cent  was 
unfunded.  If  the  pre-war  debt  is  eliminated,  the  foreign  debt 
and  the  floating  debt  will  appear  as  a  higher  percentage  of  the  war 
debt.    The  table  follows: 


98  INTERNATIONAL   FINANCE   AND    ITS    REORGANIZATION 


Analysis  of  the  French  Public  Debt  as  of  January  i,  1919 


Items 

Billion  francs 

Per  cent  of 
total  debt 

Internal  debt: 

FLxed 

67.7 
49.1 

45-9 

33-3 

Floating 

Total  domestic 

151 

15s 

116. 8 

IO-3 
10.5 

79.2 

External  debt: 

Fixed 

Floating 

Total  foreign  debt 

82.8 
64.6 

30.6 

s6-2 
43-8 

20.8 

Fixed  debt 

Floating  debt 

Total  debt 

34-2 

II3-2 

1474 

23.2 
76.8 

100. 0 

Pre-war  debt 

Figures  later  in  191 9  indicate  a  similar  distribution  and  rela- 
tively greater  long-term  debt  in  1920.' 

This  analysis  is  significant.  The  large  floating  debt  will  con- 
tinue to  be  a  disturbing  factor  until  it  is  disposed  of.  Again,  owing 
to  the  relatively  large  percentage  of  the  external  debt  France 
will  have  an  increased  annual  invisible  debit  in  the  balance  of 
trade,  and  she  will  either  have  to  export  more  to  restore  the  balance 
of  trade,  or  else  suffer  from  the  depreciation  of  her  exchanges. 
Furthermore,  should  any  reorganization  of  French  finances  take 
place,  the  large  percentage  of  the  foreign  debt  will  make  such  a 
reorganization  an  international  problem  rather  than  an  internal 
fiscal  matter. 


^  M.  Andre  Lef^vre,  in  a  report  to  the  Chamber  of  Deputies,  Journal 
Official,  Dec.  26,   1919,  pp.  15,  146. 

For  detailed  analysis  of  debt  as  of  March  i,  1921,  see  Bulletin  de 
Statistique  et  de  Legislation  Comparee,  Feb.,  1921,  pp.  247-254. 

Report  of  Consul  Chas.  D.  Westcott,  Paris,  in  Commerce  Reports,  May 
13,  1921,  pp.  898-9,  gives  figures  as  of  March  i,  1921;  total  debt  302,743 
million  francs  and  foreign  debt  83,245  million  francs,  taking  13.9  fr.  to 
the  dollar. 


FRENCH    PXJBLIC    FINANCE  99 

iii.  Advances  from  the  Bank  of  France 

Of  the  three  sources  of  funds  open  to  a  belligerent,  taxes, 
loans  and  fiat  money  or  fiat  credit,  the  first  two  were  closed  to 
France  in  1914.  Her  tax  system  was  not  capable  of  expansion, 
the  income  tax  had  not  yet  been  put  into  effect,  and  her  richest 
revenue-producing  provinces  were  invaded.  Furthermore,  she 
could  not  immediately  resort  to  loans.  Subscriptions  on  the  33^ 
per  cent  twenty-five  year  bonds  issued  in  July,  1914,  remained 
unpaid.  Therefore,  fiat  credit  was  the  sole  remaining  resource 
available. 

The  declaration  of  a  moratorium  on  August  ii,  191 4,  and 
the  suspension  of  specie  payment  made  it  necessary  for  the  state 
to  rely  upon  the  Bank  of  France  for  prompt  assistance.  Unlike 
the  ways  and  means  advances  which  were  deposit  credits  on  the 
books  of  the  Bank  of  England,  the  advances  to  the  state  by  the 
Bank  of  France  were  in  the  form  of  bank  notes,  for  the  people 
were  unaccustomed  to  the  use  of  checks.  The  French  bank  notes 
were  legal  tender,  and  gold  payments  were  suspended. 

As  the  bank  made  advances  to  the  state  it  had  to  raise  the 
limit  on  the  issue  of  bank  notes,  which  in  December,  191 1,  had 
been  fixed  at  fr.  6,800  million.  On  August  5,  1914,  the  limit  was 
raised  to  fr.  12,000  million,  to  15,000  million  on  May  11,  1915, 
to  18,000  million  on  March  15,  19 16,  to  21,000  million  on  Febru- 
ary 15,  191 7,  to  27,000  million  in  February,  1918,  and  by  succes- 
sive increases  of  about  3,000  million  to  40,000  million  in  May, 
1919,  and  43,000  million  in  August,  1920.^  The  Bank  of  Algeria 
made  advances  to  the  state,  but  in  relatively  insignificant  amounts. 

During  191 4  Bank  of  France  advances  were  the  chief  source 
of  funds.  Advances  declined  sharply  in  191 5.  Subsequently  they 
increased  because  of  the  lack  of  other  easily  tapped  sources  of 
funds.  In  191 4  Bank  of  France  advances  constituted  61.7  per 
cent  of  the  total  loans  of  the  year  and  in  191 5  only  5.8  per  cent, 

^Les  Advances  de  la  Banque  de  France  a  I'Etat  Economiste  Fran- 
?ais,  May  24,  1919,  pp.  543-5. 

The  continuous  increase  in  the  limit  of  note  issues  of  the  Bank  of 
France  brings  to  mind  the  criticism  of  Andre  Liesse  of  the  suspension  of 
the  British  Bank  Act  of  1844  during  emergencies.  See  his  volume  on 
banking  in  Franc"  in  the  National   Monetary  Commission  Report. 

Journal  Officiel,  April  29,  1920,  July  18,  1919,  Mar.  6  and  2,  1919, 
etc.  gives  text  of  law. 


lOO        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

In  1916  7.4  per  cent,  and  In  1917  12.8  per  cent.  The  increasing 
reliance  on  Bank  of  France  advances  is  an  indication  of  the  weak 
fiscal  policy  of  France.  The  extensive  use  of  bank  advances  during 
1 9 19  was  due  to  the  desire  of  the  government  to  avoid  heavy 
taxation  and  thus  to  facilitate  the  transition  from  war  to  peace. 

In  addition  to  making  advances  to  the  state,  the  Bank  of 
France  also  discounted  treasury  notes,  to  the  extent  of  fr.  3,755 
million  up  to  the  end  of  19 19,  representing  advances  to  allies. 
Bank  of  France  advances  were  retired  in  part  from  time  to  time 
by  the  issues  of  long  and  short-term  loans.  The  floating  of  every 
war  loan  was  followed  by  a  temporary  decline  in  volume  of 
advances  to  the  state.  To  accelerate  their  retirement,  the  Bank 
of  France  was  given  the  right  to  charge  interest  on  the  advances, 
as  follows:  On  a  permanent  loan  of  fr.  200  million,  no  interest; 
on  special  advances  up  to  fr,  21,000  million,  0.48  per  cent;  on 
advances  of  the  next  fr,  3,000  million,  0.35^  per  cent;  on  advances 
above  fr.  24,000  million,  3.0  per  cent,  of  which  2^^  per  cent  is 

Advances  to  the  State 


Year 

Million  francs 

Per  cent  of  total 

1914 

3,900 

15  3 

1915 

1,100 

4-3 

1916 

2,400 

9  4 

1917 

S,ioo 

20.0 

1918 

4,650 

18.2 

1919 
Total .  . 

8,350 

32.8 

25,500 

100. 0 

credited  to  a  fund  to  amortize  the  advances,  and  to  guarantee  bills 
extended  under  the  moratorium.^ 


iv.  Short-Term  Loans 

In  addition  to  advances  from  the  Bank  of  France,  the  French 
government  relied  upon  short-term  loans  because  this  type  of 
security  was  popular  in  the  money  markets  of  Europe.  Further- 
more, the  decline  in  the  volume  of  commercial  paper  as  a  result 
of  the  war  made  short-term  government  loans  an  acceptable  sub- 

*  Report  of  A.  M,  Thackara,  Consul  General  at  Paris.    July  15,  1920. 


FRENCH   PUBLIC    FINANCE 


lOI 


stitute,  particularly  in  view  of  the  fact  that  the  Bank  of  France 
rediscounts  these  bills  or  makes  collateral  loans  against  them.  The 
theory  underlying  the  use  of  the  short-term  bills  was  that  it  was 
a  prompt  and  convenient  way  of  getting  funds  which  could  be 
retired  by  subsequent  long-term  loans. 

The  bons  du  tresor,  treasury  bills,  ran  from  6  months  to  one 
5'ear,  in  denominations  of  lOO  francs  and  upward.  They  were 
used  before  the  war,  about  434  million  francs  being  outstanding 
on  July  31,  19 1 4.  These  had  been  purchased  largely  by  the  banks, 
but  during  the  war  an  effort  was  made  to  sell  them  direct  to 
investors,  particularly  after  the  armistice.  They  w^ere  sold  in 
foreign  markets  as  well  as  at  home.  The  amount  outstanding 
at  the  end  of  each  year  follows: 


Year 

Million  francs 

1914 

149 

1915 

43 

1916 

44 

1917 

30 

1918 

565 

1919* 

20S5 

*November  30. 

The  bons  de  la  defense  nat'ionale,  the  special  treasury  bills  issued 
during  the  war,  ran  from  three  to  six  months,  but  rarely  over  one 
year.  They  were  also  issued  in  denominations  as  low  as  five  francs, 
in  order  to  reach  the  small  investor,  and  as  a  result  they  passed 
as  currency.  They  were  used  in  paying  munitions  makers.  These 
bills  carried  several  inducements  to  subscribers ;  the  interest  was 
payable  in  advance,  they  were  exempt  from  taxation,  they  had  a 
variety  of  maturities,  they  were  convertible  into  long-term  bonds 
and  they  were  acceptable  as  collateral  on  loans  at  the  Bank  of 
France.  Before  the  war  the  amount  of  bons  outstanding  was 
limited  to  fr.  940  million.  This  limit  was  raised  on  December  3, 
1914,  to  fr.  1,400  million,  and  in  June,  191 5,  to  fr.  7,000  million. 
The  volume  rapidly  increased  and  the  outstanding  bons  de  la  defense 
nationale  aggregated  at  the  end  of  1916,  fr.  12,575  million;  1917, 
fr.  19,500  million;  1918,  fr.  22,334  million;  and  1919,  fr.  46,140 
million.  The  volume  outstanding  at  the  end  of  1919  was  forty- 
nine  times  as  great  as  the  pre-war  limit.     The  increase  over  the 


I02         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

previous  year  was  55  per  cent  In  1917,  14  per  cent  in  1918,  and 
106  per  cent  in  1919.  The  advances  by  the  United  States  during 
191 8  made  it  possible  to  reduce  these  issues.  The  greatest  increase 
both  in  amount  and  percentage  occurred  in  1919 — in  fact  more 
than  half  of  the  total  amount  outstanding  at  the  end  of  1919  was 
issued  during  that  year.'^" 

A  security,  intermediate  in  maturity  between  the  short-term 
bill  and  the  long-term  loan  was  the  obligation  de  la  defense 
national e.  Obligations  resembled  the  exchequer  bonds  of  Great 
Britain,  and  were  issued  for  periods  of  ten  years  and  later  in  the 
war  for  periods  of  six  years.  They  bore  5  per  cent  interest,  were 
issued  at  96.5,  and  unlike  the  treasury  bills  were  not  limited  in 
amount.  As  an  inducement  to  subscribe,  they  were  made  tax 
exempt,  and  peculiarly  the  interest  was  paid  in  advance.  These 
obligations  originally  brought  little  new  money;  they  funded  the 
short-term  treasury  bills  and  the  remainder  of  the  pre-war  loan. 
At  the  end  of  1919  fr.  568  million  of  the  ten-year  obligations 
were  outstanding  as  compared  with  fr.  365  million  at  the  end 
of  1918. 

In  the  effort  to  get  funds,  a  new  type  of  security  was  issued, 
the  obligation-bons,  a  cross  between  short-term  and  intermediate- 
term  loans.  They  were  issued  for  five  years,  but  were  redeemable 
at  the  option  of  the  holder  at  the  end  of  any  six  months  interest 
period  and  payable  with  a  bonus  of  a  half  year's  interest,  if  held 
to  maturity.  During  the  year  19 19  a  new  type  of  obligation  de  la 
defense  nationale  was  issued.  It  was  issued  for  six  years,  but 
was  redeemable  at  the  option  of  the  holder  at  the  end  of  one  and 
one-half  years,  and  at  subsequent  interest  dates  at  increasing  pre- 
miums. It  bore  5  per  cent  interest  payable  semi-annually  in 
advance.  The  inducements  offered  and  the  devices  invented  to 
obtain  funds  indicate  a  weak  fiscal  policy. 

V.  Long-Term   Loans 

The  French  fiscal  policy  was  based  on  the  assumption  of  a 
short  war.  Therefore,  the  short-term  bill  was  the  chief  reliance 
of  the  French  Treasury.  It  was  only  when  the  volume  of  short- 
term  loans  became  unmanageable  that  long-term  loans  were  issued, 

*"  Address  of  M.  Klotz,  Dec.  29,  1919.  Journal  Officiel,  Chambre, 
Debats,  p.  5400,  et  seq. 

Report  of  Consul  General  A.  M.  Tbackara,  July  15,  1920. 


FRENCH    PUBLIC    FINANCE  I03 

and  then  they  were  chiefly  funding  loans  and  raised  only  a  rela- 
tively small  amount  of  new  money.  The  Germans  apparently 
were  prepared  for  a  long  war  and  their  periodic  loans  were  timed 
with  precision.    The  French  loans  were  issued  at  irregular  intervals. 

The  first  loan,  the  National  Defense  Loan,  was  issued  in 
November,  191 5,  and  although  it  was  a  rente  perpetuelle,  it  was 
redeemable  at  the  option  of  the  government  after  January,  1 93 1. 
The  rate  was  5  per  cent  and  the  price  88.  About  10  per  cent  of 
the  total  amount  of  subscriptions  was  received  from  abroad.  About 
50  per  cent  of  the  total  subscriptions  was  in  new  money  and  the 
rest  was  in  short-term  bills  and  pre-war  rentes  which  were  con- 
vertible at  66,  a  figure  somewhat  above  the  market  rate.  This 
inducement  may  have  been  necessary  in  order  to  raise  funds  but 
the  effect  of  it  was  to  increase  the  charges  of  the  public  debt  because 
a  3  per  cent  rente  convertible  at  66  was  accepted  in  payment  of  a 
5  per  cent  bond  issued  at  88.  The  interest  on  this  loan  was  tax- 
exempt. 

The  second  loan  was  issued  in  September,  191 6,  a  reJite  per- 
petuelle, but  also  redeemable  at  the  option  of  the  government  after 
January,  1931.  The  price  was  88.75.  Treasury  bills,  obligations, 
and  the  remainder  of  the  191 4  3^'s  were  receivable  in  subscrip- 
tion. The  interest  rate  was  5  per  cent  and  the  first  installment 
was  payable  in  advance.    The  loan  was  tax-exempt. 

The  third  war  loan  was  issued  in  November,  191 7,  a  rente 
perpetuelle,  redeemable  at  the  option  of  the  government  after 
January,  1943.  The  price  was  68.60  and  the  interest  rate  4  per 
cent.  The  yield  was  therefore  higher  than  that  of  either  of  the 
earlier  loans.  As  an  inducement  to  subscribe,  this  loan  was  receiv- 
able in  payment  of  the  war-profits  tax.  Again  bons,  obligations,  and 
the  3j/2's  of  1 91 4  were  accepted  in  subscription.  As  a  result 
only  about  half  the  total  subscriptions  represented  new  money. 

The  fourth  war  loan  was  issued  in  October,  191 8,  at  70.80 
and  bore  4  per  cent  interest.  The  yield  was  lower  than  that  of 
the  previous  issues.  It  was  a  rente  perpetuelle  but  callable  at  the 
option  of  the  government  after  twenty-five  years.  The  privilege 
of  conversion,  as  in  the  case  of  the  former  loans,  was  extended 
to  the  bons  and  obligations  as  well  as  to  the  holders  of  coupons 
of  Russian  bonds  maturing  during  191 8,  which  were  accepted  up 
to  50  per  cent  of  the  total  subscriptions.  The  interest  on  this 
loan  was  exempt  from  taxation. 


I04         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


The  fifth  or  peace  loan  was  issued  in  March,  1920,  at  par, 
the  only  loan  issued  at  lOO  since  the  beginning  of  the  war.  The 
rate  of  interest  was  5  per  cent.  The  novel  feature  of  this  loan 
was  that  the  bonds  were  redeemable  at  a  premium  of  50  per  cent, 
or  at  the  rate  of  150  francs  for  a  lOO-franc  bond.  Drawings  are  to 
be  held  semi-annually  every  September  and  March  for  sixty  years 
after  September,  1920.^^  The  need  for  floating  a  lottery  loan  is 
a  reflection  on  the  strength  of  French  finances,  and  was  vigorously 
condemned  as  financial  prestidigitation. ^- 

The  sixth  war  loan  was  issued  in  the  fall  of  1920  in  denomina- 
tions from  fr.  100  up.^^  Like  the  fifth  loan  this  also  was  issued  at 
par  and  bore  six  per  cent  interest,  free  from  taxation.  The  rentes 
were  perpetual  but  the  government  had  the  option  to  redeem  or 
convert  the  bonds  after  January  i,  1 93 1.  Subscriptions  were  pay- 
able in  treasury  bills,  in  3^  per  cent  redeemable  rentes,  and  in 
any  of  the  previously  issued  war  bonds,  up  to  varying  percentages 
of  the  subscription.  The  actual  cash  received  was  33  per  cent  of 
the  amount  paid  in. 

Long-term  W.\r  Loans  of  France 


Date  of 
issue 

Rate  of 
interest 
per  cent 

Price 

Amount  Subscribed 
Million  Francs 

Paid  in  cash 

Maturity 

Par  value 

Paid  in 

Million 
francs 

Per 
cent 

I 

3 

3 

4 

Nov.,  iqi5 
Oct.,    1916 
Dec,  1917 
Oct.,   1918 

Total 

Feb.,  1920 
Nov.,  1920 

Grand  total 

5 
S 
4 
4 

87.2s 
87.50 
68.60 
70.80 

15.205 
11,514 
14,882 
31.304 

13,308 
10,082 
10,209 
22,163 

6,28s 

5,425 
5,134 
7,099 

48 
54 
50 
33 

PerpetualJ 

i 

5 
6 

76.50 

100.00 
100.00 

72,90s 

16,150 
27,000 

SS,7S2 

16,150 
27,000 

23.943 

6,300 
9,100 

43 

39 
33 

igSot 
Perpetualt 

85.40 

ij6,055 

98,912 

39,343 

40 

•  Redeemable  after  1943. 
t  Payable  by  lot  at  150. 
t  Redeemable  after  1931. 

The  yield  of  the  first  loan  was  5.73  per  cent,  of  the  second 
5.71  per  cent,  of  the  third  5.83  per  cent,  and  if  redeemed  at  par  by 
the  government  in  1943,  the  yield  would  be  6.52  per  cent.     The 

"Text  of  law  in  Economiste  Frangals,  Jan.  3,  1920,  p.  9. 

"  Liesse,  Andre,  Des  Emprunts  a  Lots,  Economiste  Fran^ais,  Oct.  18, 
and  Dec.  27,  1919,  pp.  481-3,  and  801-3. 

"Journal  Officiel,  August  3,  1920.  Economiste  Fran^ais,  August  7, 
1920,  p.  171. 


FRENCH    PUBLIC    FINANCE  I05 

approach  of  victory  in  the  autumn  of  1918  made  it  possible  to  issue 
bonds  at  a  lower  yield,  5.65  per  cent.  The  difficulties  of  the  transi- 
tion period  resulted  in  the  issue  of  a  lottery  loan,  which  would 
yield  from  about  80  per  cent  down  to  5.13  per  cent,  depending 
upon  the  date  at  which  the  bond  is  drawn  for  redemption  at  150, 
The  Ministry  of  Finance  returned  to  sound  financial  methods  in 
issuing  the  sixth  loan  at  a  yield  of  6  per  cent. 

During  the  period  of  hostilities  the  amount  of  cash  was  on  an 
average  43  per  cent  of  the  amount  paid  in  on  subscriptions.  In 
the  transition  period,  the  government  relied  on  short-term  financing 
and  therefore  the  fifth  and  sixth  loans  were  paid  for  not  in  cash 
but  in  other  securities,  to  a  larger  extent  than  previously. 

The  issue  of  bonds  at  a  considerable  discount  will  increase  the 
burden  of  the  French  debt,  should  the  option  of  redemption  ever 
be  exercised  by  the  government.  As  Gide  pointed  out,"  a  fixed 
debt  of  fr.  69,375  million  produced  only  fr.  53,280  million  in  cash, 
and  France  must  bear  a  burden  of  fr.  16,095  million  in  excess  of 
the  cash  received.  The  average  issue  price  of  the  bonds  floated  until 
the  end  of  the  war  was  about  76.6,  and  of  all  until  the  end  of 
1920  about  85.4.  If  the  bonds  are  perpetual,  and  the  discount  is 
not  amortized,  this  factor  of  course  does  not  enter. 

vi.  Foreign  Borrowing 

(a)  Long  and  Short-Term  Loans — 

France  resorted  to  short-term  foreign  borrowing  early  in  the 
war.  A  loan  for  two  millions  sterling  was  issued  through  Roth- 
schilds. In  the  first  j^ear  of  the  war,  France  sold  about  fr.  300 
million  of  one-year  treasury  bills  in  London  and  about  fr.  207 
million  in  New  York.^^  Again  in  1915  the  English  exchequer  ad- 
vanced credits  of  about  fr.  1,500  million  secured  by  a  deposit  of 
gold  of  one-third  the  amount,  and  in  1916  the  British  treasury 
agreed  to  discount  a  limited  amount  of  French  treasury  bills  matur- 
ing three  years  after  the  war.  The  foreign  subscriptions  to  the  first 
internal  loan  amounted  to  about  fr.  1,000  million.  Short-term  in- 
dustrial credits  were  opened  in  the  United  States  through  Bon- 
bright  &  Company  for  about  fr.  75  million. 

The  first  and  largest  unsecured  foreign  loan  was  the  Anglo- 

"  Economic  Journal,  September,  1919. 
"Doc.  Pari.  Senats,  1915,  p.  275. 


lo6        INTERNATIONAL   FINANCE    AND   ITS    REORGANIZATION 


French  loan,  dated  October,  1915.  The  amount  was  $500  million, 
of  which  France  received  one-half.  The  price  was  98,  the  rate  of 
interest  5  per  cent,  and  the  term  five  years. 

The  next  step  in  her  foreign  borrowing  was  the  mobilization  of 
securities  for  the  purpose  of  floating  a  secured  loan.  The  pro- 
cedure followed  was  somewhat  similar  to  that  of  Great  Britain. 
The  government  called  upon  the  holders  of  securities  of  neutral 
countries  to  deposit  them  for  a  period  of  one  to  three  years,  and 
agreed  to  add  25  per  cent  to  the  net  return.  Negotiable  receipts 
were  issued  in  exchange.  The  government  reserved  the  right  to 
hold  or  sell  the  securities,  sales  price  being  the  highest  quoted  price 
during  the  preceding  quarter.^® 

To  render  effective  its  control  over  the  movement  of  securities 
in  and  out  of  the  countrj',  France  prohibited  the  exportation  of 
capital  or  securities  for  sale  or  deposit,  or  the  opening  of  credits  to 
foreigners  or  the  purchase  of  shares  outside  of  France. 

The  first  secured  loan  placed  by  France  in  the  United  States 
was  for  $100  million.  The  collateral  was  held  by  the  American 
Foreign  Securities  Company.  It  was  dated  August  I,  1916,  ran 
for  three  years,  bore  5  per  cent  interest,  and  sold  to  the  public  at 
98.  Another  loan  of  $50  million  was  floated  in  September,  19 16. 
The  third  secured  loan  floated  in  the  United  States  amounted  to 
$100  million,  was  dated  April  i,  1917,  ran  for  two  years,  bore 
5/^  per  cent  interest,  and  sold  at  99.  It  was  convertible  at  par 
into  twenty-year,  5^  per  cent  bonds  due  April  i,  1937. 


Loans  Placed 

BY  Fran'ce  in  the  United  States  up  to 

April  i,  1917 

Date 

Loan 

Par  value 
(million  dollars) 

October,       191 5 
July,             1916 
September,  19 16 
October,       1916 
November,  19 16 

Anglo-French 

250 
100 
50 
SO 
36 
65 
100 

American  Foreign  Securities  Co 

Secured  loan  

City  of  Paris 

Lyons,  Bordeaux  and  Marseilles 

Industrial  credits  

April,            191 7 

Secured  loan 

Total 

6si 

"Economiste   Fran^ais,  pp.  254   and   262,   February   19,    1916,    and   p. 
676,  May  13,  1916.    Journal  Official,  May  5,  1916, 
London  Economist,  June  10,  1916. 
Commercial  and  Financial  Chronicle,  May  13,  1916. 


FRENCH    PUBLIC   FINANCE 


107 


The  entrance  of  the  United  States  into  the  war  reh'eved  France 
from  her  credit  difficulties.  The  direct  advances  authorized  by  the 
United  States  up  to  June  15,  1920,  totaled  $3,048  million  and  the 
cash  advanced  as  of  the  same  date  totaled  $2,957  million.  In  addi- 
tion France  obtained  advances  from  Great  Britain  amounting  to 
£470.5  million  or  about  $2,290  million.  French  dollar  treasury 
bills  were  issued  through  J.  P.  Morgan  &  Company,  after  August 
I,  1919. 

(b)  Analysis  of  the  Foreign  Debt — 

A  large  percentage  of  the  total  debt  is  in  external  loans — at 
the  end  of  191 9  about  20.8  per  cent,  excluding  treasury  bills  and 
internal  loans  held  by  foreigners. 

Most  of  the  foreign  debt  of  France  is  held  in  the  United  States 
and  Great  Britain,  with  small  amounts  scattered  in  other  countries. 
The  United  States  holds  49  per  cent,  Great  Britain  45  per  cent, 
Spain  2  per  cent,  Argentina  2  per  cent,  Switzerland  0.5  per  cent, 
and  Japan  0.5  per  cent. 

Analysis  of  the  Foreign  Debt  of  Fr.\nce,  January  i,  1919 
(in  million  francs) 


Items 

Fixed  debt: 

United  States  Treasury  advances 

Anglo-French  loan,  part 

Advances  by  banks  in  U.  S 

City  of  Paris  loan 

French  cities  loan 

Secured  loan  in  U.  S 

Japanese  loan 

Total 

Floating  debt: 
Treasury  bills  deposited  in  English  Treasury . . . 
Treasury  bills  deposited  in  the  Bank  of  England 

Treasury  bills  sold  in  England 

Bank  credit  in  Spain 

Bank  credit  in  Sweden 

Bank  credit  in  Norway 

Bank  credit  in  Argentina 

Bank  credit  in  Switzerland 

Total 

Grand  total 


Amount 


Per  cent 


12,009.9 
1,376.2 
550.5 
275-3 
201.6 
S7S-0 
147-5 


79-4 
9.1 
3-6 
1.8 

1-3 
3-8 

i.o 


15,127.0 

100. 0 

11,831.5 

1,890.0 

76.5 
12.  2 

201.8 

656.6 
76.8 
86.5 

1-3 

4-2 

0.5 
0.6 

S50-0 
178.0 

3-6 
I.I 

15,471-3 
30,598.2 


lo8        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


(c)  Offset  to  Foreign  Borrowing — 

Early  in  the  war  France  made  extensive  loans  to  her  allies. 
Up  to  the  end  of  September  30,  1920,  she  had  advanced  in  war 
materials  to  Russia  fr.  4,210  million,  to  Belgium  2,286  million,  to 
Roumania  758  million,  to  Serbia  706  million,  and  to  Poland  431 
million.  The  total  advances  made  by  France  up  to  September  30, 
1920,  were  fr.  13,617  million,  which  includes  about  4,744  million 
of  advances  and  about  8,873  million  due  for  war  materials  given 
to  them. 

Advances  by  France  to  Allies  as  of  September  30,  1920 
(in  million  francs) 


Country 

Cash 
advances 

War 

materials 
furnished 

Total 
advances 

Per  cent 
of  total 

Russia 

739 
484 
834 
788 

384 
889 

430 
121 

75 

4210 

2286 

707 

431 
758 

0 
376 
100 

5 

4,949 
2,770 

1,541 

1,219 

1,142 

889 

806 

221 

80 

36.4 

Belgium         

20.3 

Serbia 

n-3 

Poland 

9.0 

Roumania 

8.4 

Italy 

6-5 

Greece 

5  9 

Czecho-Slovakia 

Others 

1.6 
0.6 

Total 

4744 

8873 

I3>6i7 

lOO.O 

The  foreign  borrowing  of  France  is  more  than  offset  if  the 
pre-war  foreign  investments  of  France  are  included,  amounting 
to  about  fr.  40,000  million,  of  which  about  one-fourth  was  in 
Russia.^^  Other  sources  indicate  a  higher  proportion  invested  in 
Russia,  from  18,000  million  to  21,000  million  francs,  distributed 
as  follows: 

With  the  Russian  Imperial  Treasury 7,000  million  francs 

In    Russian    public    utilities,    railroads,    etc., 

more  or  less  under  government  control...  9,000  million  francs 
In    industrial    enterprises    in    private   hands 

but   with  government   guarantees 3,000  million  francs 

However,  as  M.  Andre  Lefevre  criticized  M.  Klotz  on  this 
score,  only  about  fr.  13,000  million  remain  intact  because  the  bulk 

"M.  Klotz,  in  address  to  the  French  Senate,  October  21,  1919. 


FRENCH    PUBLIC    FINANCE 


109 


of  French  investments  were  in  Russia,  Turkey  and  Mexico.  Yet, 
until  January  i,  1 92 1,  the  French  treasury  paid  coupons  on  Russian 
bonds  guaranteed  by  the  Russian  Imperial  government. 


C.  Taxes 

i.  Principles  and  Policies 

(a)  Analysis  of  Revenues — 

As  shown  above  the  ratio  of  war  taxes  to  war  expenditures  of 
France  amounted  to  about  i  per  cent.  The  total  taxes  raised  dur- 
ing the  war  did  not  greatly  exceed  the  amount  that  had  been  raised 
in  recent  years  of  peace.  The  ratio  of  total  taxes  to  total  expendi- 
tures was  92  per  cent  in  19 13,  about  16  per  cent  in  191 5,  and 
about  15  per  cent  in  1916,  1917,  and  1918.  The  relative  total  re- 
ceipts from  all  sources  of  taxation,  using  the  191 3  figures  as  a  base 
of  100,  were  79  in  1915,  96  in  1916,  119  in  1917,  and  127  in 
1918.^^  These  figures  indicate  that  France  did  not  greatly  increase 
her  war-time  revenues.  The  ratio  of  direct  taxes  to  total  taxes  was 
about  29.1  per  cent  in  1913,  26  per  cent  in  1917,  and  32  per  cent 
in  191 8.  Direct  taxes  in  France  produced  only  a  small  part  of  the 
revenue.     The  above  percentages  are  taken  from  table  on  page  49. 


Revenues  of  France 
in  million  francs 

1913 

1914 

1915 

1916 

1917 

1918 

Direct  taxes 

634 

138 

1086 

903 

754 

496 

153 
117 

745 
577 

931 
290 

437 

158 
612 

714 

764 

844 
270 

893 

181 

683 

520 

1556 

943 
240 

1017 

193 
242 

89s 
692 

1785 

1 108 
254 

727 

714 
252 

1 143 
734 

1314 
210 

Tax  on  war  profits 

Tax  on  intangibles 

Stamps 

Indirect  taxes 

Import  duties 

Tax  on  sales 

Monopolies 

103s 
539 

"54 
286 

Miscellaneous 

Total 

5089 

3309 

3799 

5016 

6186 

6534 

"AlHx,  E.,  Les  Nouveaux  Impots,   Revue  Politique  et  Parlementaire, 
March  10,  1920,  pp.  431-447. 


no        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


Relative  Figxjres 
(1913  =  100) 


Direct  taxes .  .          

100 
100 

78 
78 

69 
69 

141 
141 

160 
191 

114 

Direct  taxes  including  war-profit 
tax . .           

227 

Total  revenues 

100 

65 

75 

99 

121 

128 

(b)  French  and  British  Taxes  Compared — 

The  relatively  light  taxes  levied  in  France  stand  out  strikingly 
in  contrast  to  the  taxes  in  Great  Britain.  A  member  of  the 
Chamber  of  Deputies  called  attention  to  the  fact  that  whereas 
from  19 1 4  to  19 1 8  French  taxes  rose  only  from  fr.  90  to  103  per 
capita  per  annum  during  the  war,  British  taxes  rose  from  •  95 
francs  to  265  francs  per  capita  per  annum. ^^  In  1919  the  per  capita 
tax  in  Great  Britain  was  about  2.60  times  as  great  as  in  France. 
The  French  taxes  were  not  only  less  in  amount  than  the  British, 
but  their  distribution  was  quite  different.  The  British  relied  chiefly 
on  direct  or  personal  taxes,  the  French  chiefly  on  indirect  or  im- 
personal taxes. 

Sources  of  Taxation 


France 

Great  Britain 

Ratio  of 
British  to 

Source 

Million 
francs 

Per  cent 
of  total 

Million 
francs 

Per  cent 
of  total 

French 
taxes  in 
per  cent 

Income  tax 

370 

580 

4527 

50 
10.8 
84.2 

5,987 
5,505 
2,752 

42.1 
38.6 
19-3 

1620 

War  profits  taxes 

870 

Consumption  taxes 

61 

Total 

5477 

lOO.O 

14,244 

100. 0 

260 

The  British  total  is  2.60  times  as  great  as  the  French.^" 
But  the  British  income  tax  yielded  over  16  times  as  much  as 
the  French,  the  war  profits  tax  almost  9  times,  and  the  consumption 
taxes  only  0.6  times  the  amount  of  the  French  taxes. 

The  English  levied  relatively  few  taxes  but  relied  on  high  rates 
to  yield  large  returns.     The  French  hesitated  to  draw  upon  the 

"Gide,    Charles.      French    War    Budgets.      The    Economic    Journal, 
September,  1919. 

*' Paris  correspondence,  London  Economist,  November  9,  1918,  p.  654. 


FRENCH    PUBLIC    FINANCE 


III 


few  productive  direct  taxes,  and  resorted  to  numerous  indirect 
taxes,  bewildering  in  their  variety  and  yielding  relatively  small 
amounts. 

(c)  The  Amount  of  War  Taxes  and  Percentages  of  Total  Cost — 
The  total  non-loan  revenues  of  France  were  insufficient  to  pay 
interest  on  the  war  debt.     Non-loan  war  revenues  did  not  even 
equal  the  pre-war  revenues. 


Revenues  and  Loans  ^^ 

Expenditures, 
mUlion  francs 

Income, 
million  francs 

August  I,  1914,  to  March  31, 
Advances  to  Allies 

1919. 

174,500 
6,700 

Loans 
Other 

revenues . 

159,400 
22,500 

Foreign  debt  and  other  items 

181,200 
11,000 

181,900 

Total 

192,200 

Annual  revenues  before  war 

5, 000 
24,000 

Total  equivalent  peace  revenues  dur 

ing  war  period . . 

If  monopoly  and  other  non-tax  revenue  sources  are  excluded, 
total  tax  receipts  during  the  war  were  approximately  the  same  as 
norm.al  tax  receipts  in  pre-war  years.  According  to  Gottlieb  the 
ratio  of  war  taxes  to  war  expenditures  up  to  December  31,  igiS, 
was  i.o  per  cent,  and  war  taxes  per  capita  per  annum  equivalent 
to  12  cents. 

The  ratio  of  direct  taxes  to  total  taxes  for  the  years  1913  to  1918 
was  as  follows: 


Year 

Per  cent 

1913 
1915 
1916 
1917 
1918 

29.1 
27.9 
24.2 
26.2 
32.3 

"Peret,  Raoul,  President  of  Budget  Committee;  Journal  Officiel 
Chambre,  Debats,  pp.  1058,  et  seq.,  March  7,  1919. 

Jeze,  Gaston,  Les  Finances  de  la  Guerre  de  la  France,  Revue  Sci.  Leg. 
Fin.,  xvii:  2268-298. 


112        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


The  ratio  of  direct  taxes,  including  taxes  on  war  profits,  to 
total  non-loan  revenue  was  as  follows: 


Year 

Per  cent 

1913 

12.6 

1914 

150 

1915 

ii-S 

1916 

17.8 

1917 

19.6 

1918 

22.0 

(d)  Diversity  of  Taxes — 

Through  the  year  191 5  the  government  hesitated  to  increase 
the  rate  of  taxation  or  to  find  new  sources  of  revenue.  But  as 
the  debt  charges  grew  an  increase  of  taxation  became  imperative. 
In  191 7  the  debt  charges  were  fr.  7,645  million  and  the  revenues 
only  fr.  5,415  million.  France  lacked  a  working  income  tax  and 
had  to  resort  to  many  other  types  of  taxes.  These  were  chiefly 
indirect,  such  as  a  tax  on  retail  sales,  stamp  taxes,  taxes  on  legal 
documents,  liquors,  luxuries,  and  articles  of  consumption.  Now 
the  policy  of  financing  the  war  largely  through  short-term  loans 
and  bank  advances  led  to  inflation,  which  caused  acute  suffering 
among  the  poor.  Sales  taxes  and  consumption  taxes  aggravated 
their  difficulty. 

The  use  of  a  variety  of  indirect  taxes  has  several  disadvantages. 
They  are  not  based  on  the  principle  of  ability  to  pay.  They  are 
annoying  and  produce  the  impression  that  taxes  are  more  burden- 
some than  is  really  the  case.  The  cost  of  collection  of  many 
taxes  is  relatively  higher  than  the  cost  of  collecting  a  few.  The 
ultimate  distribution  of  a  limited  number  of  taxes  may  be  as  just 
as  that  of  a  great  variety. 

(e)  Criticism  of  Tax  Policy — 

The  theory  of  French  war  finance  at  the  outset  was  that  the 
conflict  would  be  brief  and  that  increases  in  taxation  should  be 
postponed  until  after  the  war.  As  the  war  continued  the  weak  tax 
policy  reacted  unfavorably  on  the  issue  of  loans.  Because  taxes 
were  inadequate  to  meet  the  interest  on  loans,  French  credit  de- 
clined even  at  home  and  the  government  had  to  offer  special  in- 
ducements to  insure  the  success  of  the  war  loans.     Furthermore 


FRENCH    PUBLIC    FINANCE  II3 

the  delay  in  introducing  new  taxation  during  the  war  made  it 
impossible  to  recast  the  tax  policy  during  the  period  of  readjustment 
following  the  cessation  of  hostilities.  As  a  result  the  state  was 
unable  to  rely  either  on  loans  or  on  taxes  and  had  to  resort  to 
borrowing  at  the  Bank  of  France,  which  served  to  aggravate  the 
difficulties  of  the  period  of  readjustment.  By  that  time  the  fiscal 
problem  had  become  so  serious  that  even  heroic  taxation  afforded 
no  solution  of  the  problem  of  reducing  the  floating  debt,  and  of 
retiring  the  excessive  note  issues  of  the  Bank  of  France. 

The  timidity  in  taxation  prevented  the  building  up  of  an  effec- 
tive machinery  of  administration.  Laxity  and  fraud  in  the  making 
of  returns  was  common.  According  to  the  British  Ambassador  at 
Paris  "the  impot  cedulaire  on  wages  brought  in  less  than  half  the 
figure  it  ought  to  yield.  The  majority  of  workmen  have  torn  up 
the  notices  sent  to  them  and  not  one  of  them  has  been  prosecuted. 
And  again  in  the  case  of  the  general  income  tax,  only  500,000 
persons  were  assessed  during  the  past  year  although  in  theory  it 
is  payable  by  everyone  who  earns  more  than  fr.  3,000  a  year  and 
should  obviously  be  paid  by  nearly  everybody,  since  there  is  no 
workman  or  small  tradesman  in  any  town  who  does  not  make 
more  than  ten  francs  a  day."-^ 

(f)  An  Apology  for  the  Tax  Policy — 

In  criticising  the  French  tax  policy,  several  mitigating  cir- 
cumstances should  be  borne  in  mind.  The  income  tax  had  been 
introduced  just  before  the  beginning  of  the  war,  and  it  had  not 
been  possible  to  perfect  the  methods  of  administration.  The 
declaration  of  a  moratorium  suspended  the  receipt  of  many  incomes 
on  which  taxes  might  have  otherwise  been  collected.  The  invasion 
of  northern  France  affected  the  most  productive  area,  which 
furnished  over  15  per  cent  of  the  revenue.  Again  the  proportion 
of  mobilized  men  was  89.3  per  cent  of  the  total  male  population 
between  the  ages  of  twenty  and  forty-seven.  The  eight  million  men 
who  were  mobilized  were  entitled  to  postponed  payment  of  any 
taxes  to  which  they  were  subject.  This  privilege  was  granted  also 
to  the  inhabitants  of  the  invaded  areas  and  of  the  area  of  military 
occupation  and  to  landlords  who  could  not  collect  rent  on  account 
of  the  moratorium.    The  tax  collectors  themselves  were  mobilized 

*  British  Board  of  Trade  Journal,  May  6,  1920,  pp.  603  to  605. 


114         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

SO  that  the  tax  administration  became  defective.  The  people  left 
at  home  were  women,  children  and  the  aged,  whose  income  was 
much  reduced  and  many  of  whom  had  to  be  supported  on  state 
allowances.  Man}'  of  these  were  small  investors  whose  income 
from  Russian,  Turkish,  and  other  securities  was  completely  cut  off. 
Again  wealth  is  distributed  widely  in  France  and  the  income  tax 
would  hardly  reach  the  masses  with  small  means,  such  as  petty 
merchants,  peasants,  small  landholders  and  clerks.  And  not  least 
was  the  fact  that  France  bore  the  brunt  of  the  war  and  the  govern- 
ment hesitated  to  impose  heavy  taxes  for  fear  of  breaking  the 
morale  of  the  people  and  of  encouraging  the  defeatist  element,  which 
increased  in  power  as  the  war  dragged  on.-^ 

ii.  The  Income  Tax 

In  spite  of  the  opposition  of  the  wealthy  classes  in  France,  an 
income  tax  law  was  passed  under  the  budget  for  1914,  but  the  tax 
was  not  to  go  into  effect  until  January  i,  1915.  Immediately  after 
the  enactment  of  the  tax  law  the  war  broke  out  and  although 
French  revenues  in  1914  and  1915  declined  below  the  1913  level, 
the  collection  of  the  income  tax  was  deferred  to  January  i,  1916. 
The  tax  affected  all  persons  with  incomes  of  fr.  5,000  and  over,  but 
the  full  rate  of  two  per  cent  applied  only  to  incomes  over  fr.  25,000 
There  were  abatements  for  dependent  children  and  allowances  for 
business  losses.  The  tax  administration  was  so  ineffective  that  the 
making  of  returns  was  practically  optional.  It  was  estimated  that 
about  500,000  persons  would  pay,  but  the  actual  results  showed 
only  165,000  returns.  About  fr.  2,980  million  of  taxable  income  of 
1914  paid  about  fr.  22,250  in  taxes  approximately  0.75  per  cent. 
Criticism  of  the  results  must  be  tempered  by  the  fact  that  the  tax 
was  an  untried  experiment  which  took  place  under  war  conditions. 

On  July  I,  1916,  the  tax  on  income  from  securities  was  raised 
from  4  to  5  per  cent  and  the  tax  on  income  from  foreign  securities 
was  likewise  increased.    As  a  result  of  the  experience  with  the  first 

*'Gide,  Charles,  French  War  Budgets.  The  Economic  Journal,  Sep- 
tember, 1919.  Casenave,  Maurice,  Inflation  and  High  Prices,  Proceedings 
of  the  Academy  of  Political  Science,  June,  1920,  p.  99.  British  Board  of 
Trade  Journal,  May  6,  1920. 

Bloch,  Jean,  The  Financial  Effort  of  France  During  the  War,  The 
Annals  of  the  American  Academy  of  Political  and  Social  Science,  Ixxv,  164, 
January,  191 8,  p.  204. 


FRENCH   PUBLIC   FINANCE 


"5 


income-tax  returns,  the  rates  were  raised  and  the  administration  was 
improved.  The  lower  limit  of  taxation  was  reduced  from  fr.  5,000  to 
fr.  3,000  and  the  rate  was  raised  and  graduated  up  to  10  per  cent  on 
incomes  over  fr.  150,000.  To  secure  the  enforcement  of  the  tax  the 
failure  to  file  returns  was  penalized.  The  returns  were  checked 
and  penalties  were  provided  for  the  failure  to  explain  mooted  points 
although  the  taxpayer  could  not  be  compelled  to  produce  his  books. 
As  a  result  of  the  more  effective  administration  of  the  tax,  the 
comparative  returns  doubled  in  number  and  increased  eightfold  in 
yield.  On  July  31,  1917,  the  income-tax  rate  was  raised  from  10 
to  12  per  cent  on  incomes  over  fr.  150,000,  with  graduated  rates  on 
incomes  up  to  that  amount.  In  July,  19 1 8,  a  more  steeply  gradu- 
ated set  of  rates  was  put  into  effect  ranging  from  i^  per  cent  on 
incomes  of  fr.  5,000  to  16  per  cfnt  on  incomes  of  fr.  150,000,  and 
continuing  upward  to  20  per  cent  on  incomes  above  fr.  550,000. 
The  increased  yield  of  the  income  tax  was  pointed  out  in  a  report 
to  the  Finance  Committee  of  the  Chamber  of  Deputies  prepared 
by  M.  De  Lasteyrie.^ 

Income-tax  Returns 


Date  of  law 

Rate 
per 
cent 

Taxable  Income 

Amount  of  Tax 

Average 
tax 

Year  of 
return 

Million 
francs 

Relative 

figures 

Million 
francs 

Relative 
figures 

rate 
per 
cent 

1916 
1917 
1918 
1919 

Dec.  29,  1915 
Dec.  30,  1916 
July  31,  1917 
June  29, 1918 

2 
10 

12. 5 
20 

5047 
7055 
8297 
8185 

100 
140 
164 
162 

45 
230 

483 
440 

100 

505 

1060 

968 

0.9 

3  3 
5-8 

5-4 

The  increase  in  the  amount  of  the  tax  is  an  admirable  proof  of 
the  capacity  for  increasing  the  yield  of  direct  taxation.  The  Act 
of  July  31,  1917,  levied  a  head  tax  of  5  francs  for  every  person 
having  an  income.  A  head  tax  or  war  impost  was  laid  on  every 
man  of  military  age  who  was  not  mobilized. 

iii.  Profits  Taxes 

An  excess-profits  tax  law  was  passed  on  July  I,  1916,  and  ap- 
plied to  profits  earned  during  the  v/ar  and  for  twelve  months  after 


"France's  Financial  Position.    Board  of  Trade  Journal,  May  6,  1920, 
p.  603. 


Il6        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

its  close.  The  rate  was  50  per  cent  upon  the  excess  of  profits  over 
a  pre-war  normal  which  was  based  on  the  three  years  prior  to 
August  I,  1 914.  On  September  30,  191 6,  the  rate  was  increased  to 
60  per  cent  on  the  taxable  excess  above  fr.  500,000.  On  July  31, 
1917,  an  additional  tax  of  4^^  per  cent  on  business  profits  exceed- 
ing fr.  5,000  was  put  into  effect.  There  were  various  abatements  on 
profits  over  fr.  1,500,  the  lower  limit.  At  the  same  time  a  tax  of 
S}i  per  cent  applying  to  agricultural  profits,  to  salaries,  and  to 
professional  fees,  was  enacted. 

Because  of  the  extensive  evasion  of  the  excess-profits  taxes,  a 
committee  of  the  Senate  and  Chamber  of  Deputies  investigated 
industrial  profits  and  reported  that  it  would  be  possible  to  collect 
over  a  half  billion  francs  from  the  war  industries.^^ 


iv.  Indirect  and  Other  Taxes 

The  indirect  taxes  yielded  the  largest  part  of  the  total  tax 
revenue  of  France.  The  Act  of  July  i,  191 6,  increased  import 
duties,  particularly  on  tropical  products,  tea,  coffee,  vanilla,  pepper, 
cinnamon,  cocoa,  tobacco,  sugar,  molasses,  etc.  Luxury  taxes  were 
levied  upon  the  use  of  horses,  carriages,  automobiles,  clubs,  upon 
hunting,  billiards,  and  upon  admission  to  theaters,  cinemas,  and 
other  amusement  resorts.  Excise  taxes  were  imposed  on  mineral 
waters  and  alcoholic  drinks.  Rates  were  increased  on  state 
monopolies,  telephones,  telegrams  and  postal  service. 

The  same  act  imposed  a  tax  on  retail  sales  amounting  to  o.i 
per  cent  on  sales  of  one  million  francs  per  annum  up  to  0.5  per 
cent  on  sales  of  over  200  million  francs.  The  sales  tax  was  in- 
creased in  191 8.  In  March,  1918,  additional  consumption  taxes 
were  put  into  effect,  including  a  tax  of  0.2  per  cent  on  the  retail 
price  of  all  luxuries  costing  fr.  150  or  more  and  in  addition  a  tax  of 
10  per  cent  upon  the  retail  price  of  any  article  designated  as  an 
article  of  luxury  and  upon  expenditures  made  in  so-called  luxury 
establishments.  The  luxury  taxes  were  subsequently  modified  as  a 
result  of  much  opposition. ^° 

"November  1,  1919. 

"Jeze,  Gaston,  Les  Finances  de  Guerre  de  la  France,  Revue  de  Science 
el  de  Legislation  Financieres,  1919;  x\ii:  3,  pp.  268-314,  covers  budget 
proposals,  criticism  and  legislative  debates. 


FRENCH    PUBLIC    FINANCE  II7 

D.  The  Post-War  Budget 

i.  Sections  of  the  Budget 

The  French  budget  consists  of  three  parts,  the  ordinary,  the 
extraordinary,  and  the  special  section.  The  ordinary  budget  covers 
the  normal  and  permanent  expenditures  of  the  government.  This 
budget  is  met  by  taxation.  The  extraordinary  budget  provides  for 
charges  of  a  temporary  nature,  due  to  the  liquidation  of  war-time 
obligations.  It  is  temporary  and  ceases  to  exist  after  these  obliga- 
tions are  met.  The  extraordinary  expenditures  are  covered  by 
loans  and  by  the  liquidation  of  war  stocks.  The  third  section  of 
the  budget  covers  expenditures  which  under  the  treaty  are  recover- 
able from  Germany,  such  as  the  reconstruction  of  the  devastated 
areas  of  France,  and  pensions  to  the  incapacitated,  to  widows  and 
to  orphans.  These  items  are  charged  to  an  account  of  expenditures 
recoverable  through  payments  to  be  received  upon  the  execution  of 
the  Treaty  of  Peace.  These  are  regarded  as  temporary  burdens 
which  France  expects  to  transfer  to  Germany  at  the  earliest  possible 
date ;  in  the  meantime  France  merely  acts  as  a  banker  and  advances 
credits  to  her  nationals  on  account  of  the  indemnity  to  be  received 
from  Germany.^^ 


ii.  The  Budget  of  rg20 

The  budget  presented  by  M.  Klotz  on  January  20,  1920,  was 
modified  by  his  successor,  M.  Marsal,  and  was  adopted  by  both 
the  Senate  and  the  Chamber  of  Deputies  on  July  31,  1920.  It 
called  for  an  expenditure  of  fr.  47,932  million,  which  is  lO.i  times 
as  great  as  the  budget  in  1913  of  fr.  4,739  million.  The  public- 
debt  charges  in  the  1920  ordinary  budget  are  2.5  times  as  great 
as  the  entire  budget  expenditures  of  191 3. 

"  M.  Louis  Klotz  in  the  presentation  of  the  budget,  January  21,  1920. 

M.  Frangois  Marsal  in  a  letter  to  the  Budget  Commission,  April  10, 
1920. 

Board  of  Trade  Journal,  May  6.  1920,  p.  603. 

Statement  of  the  French  High  Commission  In  the  United  States. 
February  24,  1920. 

Economiste  Frangais,  January  31,  April  17  and  24,  1920,  pp.  129-131, 
481-484,  513-515. 


IlS        INTERNATIONAL   FINANCE    AND    ITS    REORGANIZATION 


Budget  Adopted  July  31,  1920 


Items 

In  million 
francs 

Per  cent  of 
ordinar>- 
budget 

Per  cent  of 

total 

budget 

Ordinary  budget: 
Ser\ace   of  public  debt 

11,633 
7,629 

2,370 
129 

53-5 
350 

10.9 
0.6 

24. 2 

Expenses  of  ministries 

For  collection  of  public  revenues  and 

operating  public  monopolies 

Miscellaneous 

Total 

21,761 

5,420 
20,751 

100.00 

45-4 

II-3 
43-3 

Extraordinary  budget 

Expenses  recoverable  from  Germany 

Grand  total 

47,932 

100. 0 

Sources  of  Ordinary  Revenue  -^ 


Items 


Direct  taxes  and  contributions . 

Indirect  taxes 

Monopolies 

War  profits  tax 

Sales  of  war  stores 

Sundries 


Total. 


Million  francs 


1,923 
8,484 
1,998 
4,000 
2,91s 
2,450 


21,770 


The  extraordinary  budget  receipts  are  taken  from  loans  made 
in  1920. 

The  ordinary  budget  for  1920  is  4.6  times  as  great  as  the 
budget  for  1913.  The  item,  "service  of  public  debt,"  in  the  1920 
budget  is  9.0  times  as  great  as  in  the  1 91 3  budget.  The  expense 
of  ministries  in  the  1920  budget  is  2.2  times  that  of  the  1913 
budget. 

The  ordinary  budget  for  1 92 1  was  slightly  larger  than  in 
1920.^° 

''Source:  Journal  Officiel,  August  1,  1920,  pp.  10,947-11,003. 
''Ibid. 

"L'Expose  des  motifs  du  Budget  de  1921.     Economiste  Fran^ais,  No- 
vember 13,  20  and  27,  1920,  February  12,  1921. 


J 


FRENCH   PUBLIC   FINANCE 


119 


Budget  for  1921 
(in  million  francs) 


Expense 


Revenue 


Surplus 


Deficit 


Ordinary  budget 

Extraordinary  budget 

Expenses  recoverable  from  Germany 

Total 


22,327 

5,499 

i6,57S 


22,335 

2,628 

o 


2,871 
i6,57S 


44,401 


24,963 


19,438 


The  largest  item  In  the  1921  budget  is  the  service  of  the  public 
debt,  amounting  to  fr.  10,244  million  or  41  per  cent  of  the  total, 
and  the  next  largest  is  the  military  expense  of  fr.  4,613  million  or 
21  per  cent  of  the  total,  larger  by  fr.  1,097  million  than  in  1920. 
In  addition  the  extraordinary  budget  shows  a  military  expenditure 
of  fr.  2,814  million  or  51  per  cent  of  the  total  of  which  more  than 
half  covers  operation  abroad  in  Syria,  Cilicia,  and  Morocco.  The 
deficit  in  the  extraordinary  budget  is  about  equal  to  the  military 
expenditures — a  telling  comment  on  the  relations  of  finance  and 
politics. 

For  comparison  the  pre-war  budget  is  given  herewith: 

Budget  of  1913 


Items 

Million  francs 

Per  cent 

Branches  of  expenditure: 
Public  debt 

1286 

1450 
2002 

27.1 
30.6 
42.3 

Expenses  of  the  Ministries  of  War  and  Marine . . 
Other  ministries 

Total 

4738 

622 
2649 
778 
625 
678 

568 

969 
5 10 
385 

499 

100. 0 

Sources  of  revenue: 

Direct  taxes 

131 
55-9 

Indirect  taxes 

Registration 

Customs 

Indirect  contributions 

Taxes  on  bourse  operations,  on  sugar,  stamp 
taxes,  etc 

Monopolies 

20.4 

Tobacco 

Posts,  telegraphs 

Sundries 

10  6 

Total 

4739 

100.0 

120        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

iii.  Tax  Increases 

The  tax  law  of  June  25,  1920,  provided  for  a  substantial  in- 
crease in  taxation.  The  war  profits  tax  of  50  per  cent  on  the 
excess  over  pre-war  profits  was  abandoned.  A  series  of  direct  taxes, 
including  special  and  general  income  taxes,  provided  for  increased 
revenue.  Business  profits  in  excess  of  fr.  5,000  were  taxed  at  the 
rate  of  8  per  cent,  agricultural  profits  above  fr.  4,000  were  taxed 
at  the  rate  of  6  per  cent,  and  salaries  and  various  forms  of  unearned 
income  in  excess  of  about  4,000  at  the  rate  of  6  per  cent.  The 
income  from  real-estate  was  taxed  at  10  per  cent,  subject  to  specified 
abatements.  The  income  from  mines  was  taxed  at  the  rate  of  20 
per  cent. 

The  general  income  tax  of  191 7  was  levied  on  all  incomes  in 
excess  of  fr.  3,000  over  and  above  allowances  for  dependents.  The 
rates  ranged  from  1^4  per  cent  of  the  taxable  income  between  fr. 
3,000  and  fr.  8,000  up  to  II^  per  cent  on  the  excess  over  fr. 
150,000.  The  law  of  1920  increased  the  exemption  limit  as  well 
as  the  allowances  for  dependents.  But  the  rates  ranged  from  2  per 
cent  on  portions  of  incomes  between  fr.  6,000  and  fr.  20,000  up  to 
50  per  cent  of  that  part  of  the  income  exceeding  fr.  550,000.  An 
estate  tax,  applicable  only  if  there  were  three  children  or  less, 
ranged  from  ^  of  i  per  cent  to  3  per  cent  on  estates  of  fr.  2,000 
or  less  up  to  7^  to  39  per  cent  on  the  fraction  exceeding  fr.  500,000 
depending  on  the  number  of  children.  In  addition  the  heir  must 
pay  an  inheritance  tax  ranging  from  i  per  cent  to  59  per  cent  de- 
pending upon  the  amount  of  the  inheritance  and  the  degree  of  the 
relationship,  subject  to  the  limitation  that  the  combined  estate  and 
inheritance  taxes  shall  not  exceed  80  per  cent  of  the  value  of  the 
property  received  by  any  heir. 

Of  the  indirect  taxes  the  tax  on  sales  is  the  most  important, 
levied  at  the  rate  of  i  i/io  per  cent  on  the  net  sales  of  merchants 
and  on  the  gross  profits,  commissions,  interest  and  other  charges  of 
bankers  and  brokers.  Several  transactions  were  exempt  such  as 
dealings  in  bread,  in  products  under  a  state  monopoly,  or  in  service 
under  franchises,  dealings  by  brokers  whose  charges  are  fixed  by 
law,  and  dealers  in  commodities  or  services  paying  the  luxury 
tax. 

In  addition  there  were  enacted  a  great  number  of  indirect  taxes, 
such  as  stamp  taxes  on  legal  papers,  the  transfer  of  securities  or  of 


FRENCH    PUBLIC    FINANCE  121 

personal  property  or  real-estate.  Excise  taxes  were  levied  on  wines, 
liquors,  beers,  mineral  waters,  and  playing  cards.  Consumption 
taxes  were  levied  on  tea,  coffee,  sugar,  cocoa,  and  spices.  The 
luxury  taxes  covered  a  long  list  of  articles.  There  were  taxes  on 
automobiles,  carriages  and  motor  boats.  Places  of  amusement  such 
as  music  halls,  moving  picture  houses,  theaters  were  taxed  on  the 
gross  receipts  at  rates  ranging  from  6  per  cent  to  25  per  cent.^^ 

France  made  earnest  efforts  to  increase  her  revenues,  and  the 
tax  statistics  indicate  progress  in  this  direction.  The  returns  for 
the  first  seven  months  of  19 19  were  fr.  975  million  in  excess  of 
the  estimates  and  fr.  2,000  million  over  the  yield  for  the  correspond- 
ing period  for  19 1 8.  The  amount  of  taxes  collected  in  191 9 
exceeded  those  of  1 918  by  substantial  percentages  as  follows:  For 
the  month  of  April,  25  per  cent ;  May,  22  per  cent ;  June,  20  per 
cent;  July,  30  per  cent;  August,  19  per  cent,  and  September,  32 
per  cent.  The  yield  from  indirect  taxes  and  monopolies  for  June, 
1920,  was  fr.  908  million,  an  amount  30.6  per  cent  in  excess  of  the 
estimates  and  29.6  per  cent  above  the  June,  1 919,  figures.  The 
returns  for  the  first  six  months  of  1920  were  fr.  1,635  million  in 
excess  of  the  estimates  and  almost  fr.  2,000  million  above  the  19 19 
figures  for  the  corresponding  period.^- 

The  increase  of  taxes  in  1 920  over  19 19  per  individual  is  an 
indication  of  France's  effort  to  balance  her  budget.  According  to 
an  estimate  prepared  by  the  French  Minister  of  Finance,  the  total 
taxes  paid  on  an  income  of  fr.  260  thousand  would  amount  in  191 9 
to  25  per  cent,  and  in  1 920  to  42  per  cent.  By  the  same  estimate 
an  individual  income  of  fr.  600  thousand  would  have  paid  in  19 19 
28  per  cent  and  in  1920,  61  per  cent.  A  person  with  an  income  of 
fr.  50  thousand,  would  in  191 9  have  paid  15  per  cent  and  in  1920, 
22  per  cent.  The  corresponding  taxes  in  the  United  States  were 
considerably  lower  in  both  years.  These  estimates  are  not  absolutely 
accurate  for  the  rate  per  individual,  but  they  serve  to  indicate 
France's  effort  to  increase  taxes. 

The  increase  in  the  national  revenue  in  1 920  arose  chiefly  from 
indirect  taxes.  To  meet  the  ordinary  budget  the  following 
schedule  of  increased  taxes  has  been  put  into  effect  as  of  July 
I,  1920: 

"Journal  Officiel,  June  26,  1920,  pp.  8990-9005;  also  Economiste 
Francais,  July  3,  10,  17,  24,  31,  1920;  pp.  7,  39,  71,  103,  137. 

"  Economiste  Francais.    Le  Renderaent  des  Impots.    Reported  monthly. 


122        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


Taxes 

Million  francs 

Income  taxes 

1,300 
500 

S,40o 
950 
350 

Tax  on  wealth 

Sales  tax 

Excise  tax 

Better  tax  administration 

Total  increases 

8,500 
11,500 
20,000 

Old  schedules  in  1920 

Grand  total 

The  budget  revenue,  however,  was  not  realized  with  respect  to 
many  of  the  taxes.  For  instance  the  sales  tax  which  was  to  have 
yielded  fr.  460  million  per  month  produced  only  fr.  234  million  or 
51  per  cent  in  September,  1920,  fr.  203  million  or  44  per  cent 
in  November,  1920,  and  fr.  152  million  or  33  per  cent  in  February, 
1 92 1.  In  a  period  of  declining  prices,  revenues  based  on  selling 
prices  must  decline.  Except  for  the  indirect  taxes  and  monopolies 
the  several  items  of  the  budget  yielded  less  than  the  estimates,  par- 
ticularly in  the  case  of  direct  taxes.  For  the  year  1 920  the  taxes 
collected  amounted  to  81  per  cent  of  the  estimates,  and  if  the 
arrears  be  included  to  91  per  cent  of  the  estimate. 


Estimated  and  Actual  Revenue  for  1920 


Source 

Estimated 

revenue. 

Million 

francs 

Actual 
revenue. 
Million 
francs 

Per  cent  of 

actual  to 

estimated 

revenue 

Direct  taxes  and  contributions.  . . . 

Indirect  taxes  and  monopolies 

War  profits 

1,923 

10,482 
4,000 
2,915 
2,450 

757 
12,060 

2,393 
1,650 

727 

39 

"S 

60 

Sales  of  supplies 

S6 

^0 

Sundries        

Total 

21,770 
0 

17,587 
2,247 

81 

Arrears 

10 

Grand  total 

21,770 

19,834 

91 

FRENCH    PUBLIC    FINANCE  1 23 

E.  Appraisal  of  French  War  Finance 
i.  Facts 

The  pertinent  facts  concerning  French  war  finance,  given  In  this 
chapter,  stand  out  clearly.  The  percentage  of  total  expenditures 
raised  by  taxation  was  very  low.  The  needs  of  the  war  were  met 
largely  by  loans  and  advances  from  the  Bank  of  France.  Loans 
were  raised  abroad  to  a  considerable  extent.  Of  the  internal  loans, 
a  very  large  percentage  were  short-term  or  floating. 

The  war  was  financed  originally  by  means  of  advances  from  the 
Bank  of  France,  followed  by  the  issue  of  short-term  domestic 
obligations,  which  were  subsequently  funded  by  long-term  loans 
raising  little  new  money.  When  the  domestic  credit  supply  proved 
inadequate,  France  raised  some  short-term  loans  abroad  and  later 
issued  several  external  long-term  loans,  originally  unsecured,  and 
subsequently  secured.  The  problem  of  financing  the  war  became 
acute  just  before  the  United  States  entered  the  war.  Government 
advances  by  the  United  States  temporarily  solved  the  fiscal  prob- 
lems of  France.  For  almost  a  year  after  the  armistice  advances  by 
the  United  States  continued.  The  internal  financial  policy  of 
France  after  the  armistice  depended  almost  entirely  upon  the 
further  issue  of  short-term  funds  and  further  Bank  advances. 

ii.  The  Effects  of  French  Financial  Policy 

(a)  Bonk  of  France  Advances — 

Because  of  the  reluctance  to  raise  money  by  extensive  taxation 
during  the  war,  France  resorted  to  the  policy  of  inflation.  Notes 
issued  by  the  Bank  of  France  were  not  very  different  from  fiat 
money  printed  by  the  government.  The  Bank  of  France  not  only 
advanced  notes  to  the  state,  thus  producing  an  inflation  of  the 
currency,  but  furthermore  it  discounted  the  ever-increasing  volume 
of  treasury  bills  and  thus  produced  an  inflation  of  credit.  As  a 
result  the  cost  of  living  in  France  rose  more  rapidly  than  in  either 
England  or  the  United  States,  where  a  vigorous  tax  policy  was 
followed.  Consequently  the  value  of  the  franc  declined  in  those 
countries  where  the  currency  had  not  depreciated  to  the  same  ex- 
tent. The  foreign  exchange  rates  on  France  became  increasingly 
unfavorable.  In  the  policy  of  financing  the  war  by  inflation  lay 
the  cause  of  most  of  the  post-war  financial  difficulties  of  France. 


124        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

(b)  Short-Term  Loans — 

In  order  to  resort  to  extensive  short-term  financing,  the  legal 
limit  on  the  issue  of  treasury  bills  was  raised,  again  and  again, 
whenever  it  was  found  convenient  to  obtain  money  through  short- 
term  obligations.  As  the  volume  outstanding  grew,  the  Treasury 
found  it  increasingly  difficult  to  raise  funds  and  resorted  to  all 
sorts  of  devices  such  as  the  payment  of  interest  in  advance,  the 
extension  of  the  privilege  of  redemption  at  the  option  of  the  holder 
at  the  end  of  any  interest  period,  and  the  payment  of  a  bonus  of  a 
half  year's  interest  if  the  investor  did  not  exercise  the  option  before 
maturity.  As  the  ratio  of  unfunded  debt  to  the  total  debt  in- 
creased, the  government  found  the  maturing  short-term  debt  un- 
manageable and  renewals  had  to  be  made  at  ever-increasing  rates 
of  interest.  During  the  last  year  of  the  war  a  long-term  loan  could 
hardly  be  raised,  and  treasury  bills,  Bank  of  France  advances,  con- 
stituted the  chief  reliance  during  191 8.  The  French  followed  a 
hand-to-mouth  policy.  Opportunism  rather  than  foresight  was  its 
guiding  principle. 

(c)  Long-Term  Loans — 

The  failure  to  develop  vigorous  measures  of  taxation  reacted 
to  the  injury  of  the  loan  policy.  Probably  the  most  serious  mis- 
take, from  the  point  of  view  of  after-war  taxation  and  the  balancing 
of  the  budget,  was  the  exemption  from  taxation  of  income  from 
war  loans.  It  is  not  quite  correct  to  say  that  the  French  internal 
debt  constitutes  no  burden  because  "what  the  government  takes 
out  of  the  pockets  of  the  French  holders  in  taxes  to  pay  the  interest 
on  its  bonds,  it  returns  to  their  pockets  in  the  interest 
that  it  pays  them.  Figures  for  the  income  of  the  people  and  figures 
for  the  budget  of  the  state  are  thus  swollen  by  what  is  after  all 
merely  a  transfer  of  funds."^^  Quite  the  contrary  is  true.  The 
burden  of  interest  payable  by  the  state  is  increased,  because  the 
state  has  forfeited  the  right  to  tax  the  income  on  war  loans,  or 
because  of  a  weak  tax  policy  has  had  to  bargain  it  away. 

Another  indication  of  the  effect  on  long-term  loans  of  the 
opportunist  fiscal  policy  was  the  increasing  discount  on  bonds  issued. 
According  to  Gide,  the  average  price  at  which  French  bonds  were 
floated  was  about  76,  or  24  points  below  par.     If  the  bonds  are 

"Anderson,  B.  M.    Effects  of  the  War  on  Money,  Credit  and  Banking 
in  France,  p.  103. 


FRENCH    PUBLIC    FINANCE  125 

perpetual,  the  only  effect  of  the  discount  is  to  make  the  return  higher 
than  the  rate  of  interest.  But  if,  as  is  likely,  the  state  will  exercise 
the  option  of  redemption  after  193 1  or  1943,  it  will  have  to  pay 
about  fr.  20,000  million  in  excess  of  the  monies  received  by  it, 
making  the  yield  of  the  loans  considerably  higher. 

The  long-term  loans  raised  new  money  only  in  part.  They 
made  possible  funding  operations  and  the  decrease  of  the  floating 
debt  and  to  some  extent  the  temporary  reduction  in  the  aggregate 
Bank  of  France  advances.  In  the  later  loans,  subscriptions  were 
accepted  in  the  form  of  loans  already  outstanding  and  bearing  a 
lower  rate  of  interest.  Thus,  interest  charges  were  increased,  but 
no  fresh  funds  were  raised.  Again,  after  the  situation  in  Russia 
became  chaotic,  France  accepted  matured  Russian  interest  coupons 
in  payment  of  subscriptions  to  her  own  long-term  loans.  The 
right  of  conversion  of  loans  into  later  issues  was  maintained  prac- 
tically throughout  the  war,  thus  raising  the  rate  of  interest.  This 
was  not  true  either  in  England  or  the  United  States.  Because 
French  credit  was  not  supported  by  a  consistent  policy  of  taxation, 
the  government  had  to  offer  all  sorts  of  inducements  to  secure 
subscriptions.  Long-term  securities  were  receivable  for  excess- 
profits  taxes,  which  were  intended  to  meet  current  expenses.  To 
make  ten-year  loans  acceptable,  they  were  sugar-coated  with  features 
of  short-term  loans  giving  the  holder  an  option  to  redeem  at  any 
interest  date,  and  the  interest  on  them  was  paid  in  advance.  To 
induce  buyers  to  hold  the  bonds,  premiums  were  offered  on  redemp- 
tion on  a  scale  increasing  annually  to  maturity. 

The  percentage  of  foreign  debt  increased  as  the  war  continued. 
In  the  mobilization  of  her  securities  for  the  purpose  of  obtaining 
further  loans  abroad,  the  French  Treasury  had  to  offer  more 
favorable  terms  than  the  British  did.  To  cap  the  climax,  French 
credit  had  so  deteriorated  by  the  end  of  the  war  that  the 
Credit  National  found  it  necessary  to  resort  to  a  lottery  loan 
in  spite  of  the  government  guarantee  of  interest  and  principal. 
Under  its  provisions  a  fifty  franc  bond  might  have  the  chance 
weekly  of  drawing  fr.  1,250,000  as  a  prize.  The  premium  bonds 
were  traded  in  on  the  London  Stock  Exchange  shortly  after  issue 
but  dealings  in  them  were  declared  illegal  under  the  anti-gambling 
act  of  Parliament  of  1823.  In  the  loan  issued  November,  1920, 
interest-bearing  certificates  for  small  amounts  were  issued  in  cur- 
rency size  to  circulate  as  money  and  bear  interest  at  the  same  time. 


126        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  unhappy  experience  of  the  United  States  in  the  American 
Revolution  and  the  Civil  War  seemed  to  have  failed  as  a  deterrent. 

(d)  Taxes — 

The  chief  defect  of  the  tax  policy  during  the  war  was  the  lack 
of  a  broad  basis  of  taxation  and  the  need  for  resorting  to  a  multi- 
tude of  diverse  taxes  each  yielding  relatively  little.  During  the 
war  France  raised  a  smaller  percentage  of  her  war  expenditures  by 
war  taxes  than  any  of  the  other  major  belligerents.  France  relied 
chiefly  upon  indirect  taxes.  Because  of  the  lack  of  an  effective  and 
well  administered  income  tax  the  treasury  was  hard  pressed  to  find 
new  and  productive  sources  of  revenue.  On  the  whole  the  tax 
policy  was  weak,  one-sided  and  unproductive.  The  inflation  of 
currency  and  credit  caused  a  rise  in  prices,  which  in  effect  con- 
stituted a  reduction  in  purchasing  power  or  a  steep  and  ungraduated 
income  tax  on  all,  poor  or  rich.  This  grave  injustice  was  aggra- 
vated by  the  levying  of  consumption  taxes  which  further  increased 
the  cost  of  living.  This  increase  was  in  proportion  to  the  size  of 
the  family  and  defeated  the  measures  to  increase  the  population. 
The  sales  tax,  the  mainstay  of  post-war  fiscal  policy,  is  unreliable 
because  its  yield  declines  as  prices  fall  after  the  war.  The  tax 
policy  of  France  was  economically  unsound  and  politically  un- 
democratic. 

(e)  Change  of  Fiscal  Policy — 

Like  the  United  States  in  the  War  of  1812,  France  had  to 
change  her  policy  in  the  middle  of  the  war.  The  original  policy, 
if  there  were  any  such,  had  broken  down.  France  had  expected 
to  finance  the  war  by  loans  and  Bank  of  France  advances  and  to 
resort  to  taxation  after  the  war.  She  reversed  this  policy  and 
undertook  to  introduce  extensive  tax  measures  from  191 6  onward. 
The  long  continuation  of  the  war  had  exploded  the  original  theory 
of  finance  adapted  to  a  short  war. 

iii.  The  Causes  of  the  Difficulty 

(a)  Bad  Pre- War  Situation — 

France  did  not  choose  a  policy  of  war  finance,  it  was  thrust 
upon  her  by  the  consequences  of  her  pre-war  policy.  The  French 
theory  of  a  perpetual  debt,  as  a  source  of  investment  for  the  savings 


FRENCH    PUBLIC    FINANCE  1 27 

of  her  population,  has  proved  a  danger  and  a  stumbling  block  in 
national  finances.  For  forty  years  before  the  war,  administration 
after  administration  lacked  the  courage  to  deal  with  the  debt,  left 
as  a  legacy  of  the  Franco-Prussian  War.  The  pre-war  fiscal  situa- 
tion in  France  was  not  sound.  To  balance  the  budget  a  loan 
was  floated.  To  meet  current  expenses  for  the  army  and  navy, 
it  was  necessary  to  issue  a  loan  of  about  fr.  900,000,000.  The  war 
broke  out  while  the  installments  on  this  loan  were  being  paid. 
France's  tax  system  before  the  war  was  inequitable.  There  was 
relatively  little  direct  taxation  as  in  Great  Britain.  There  was 
less  taxation  graduated  in  accordance  with  ability  to  pay.  The 
application  of  the  principle  of  ability  to  pay  is  not  only  sound 
ethically  and  politically,  but  it  is  practical  economically  for  when 
taxes  must  be  promptly  increased,  a  rise  in  the  rates  applicable  to 
the  wealthy  classes  in  the  simplest,  surest,  and  quickest  way  of 
increasing  government  revenues.  The  system  of  taxation  in  France 
before  the  war  was  inexpansible.  When  the  income  tax  law  was 
finally  passed,  in  spite  of  the  opposition  of  the  wealthy  classes, 
there  was  little  opportunity  to  perfect  the  details  of  administration 
before  the  war  broke  out  and  exposed  the  defects  in  the  pre-war 
scheme  of  taxation. 

(b)   The  Theory  of  a  Short  War — 

The  theory  of  French  finance  was  that  the  war  would  last  a 
short  while,  and  that  therefore  short-term  loans  and  advances  from 
the  Bank  of  France  would  afford  adequate  temporary  financing. 
Permanent  fiscal  measures  were  to  be  enacted  after  the  war. 
France's  fiscal  policy  probably  would  have  worked  in  a  short  war, 
but  certainly  no  better  than  the  British  or  the  American  program 
did.  However,  continuation  of  the  war  broke  the  scheme.  French 
finances  were  saved  by  American  intervention.  The  justification 
of  the  French  program  by  Charles  Gide,  Maurice  Casenave  and  J. 
Frederic  Bloch  must  be  followed  sympathetically  by  a  world  that 
has  seen  France  bleed  and  suffer  grievously.  But  why  should  not 
the  faulty  financing  during  the  French  revolution  and  the  make- 
shift financing  in  the  United  States  of  the  American  Revolution 
and  of  the  War  of  181 2  have  furnished  adequate  historic  examples 
of  a  policy  not  to  be  followed  ? 

As  a  consequence  of  the  short-war  theory  of  finance,  the  govern- 
ment found  it  necessary  to  meet  the  burdens  of  the  transition  period 


128        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

without  resort  to  additional  taxes  or  to  long-term  loans.  Financ- 
ing during  the  year  after  the  war  was  effected  by  a  large  increase 
in  the  floating  debt  and  an  increase  in  the  issue  of  bank  notes, — 
two  factors  resulting  in  a  rapid  rise  in  prices.  On  the  theory  that 
the  Government  was  to  give  industry  and  commerce  an  opportunity 
to  resume  its  pre-war  status,  without  the  obstacles  of  increased  taxes 
or  of  a  big  funded  loan,  the  credit  pyramid  was  rendered  more 
unstable.  The  fallacy  of  the  policy  became  apparent  at  the  end 
of  the  year  and  the  country  insisted  upon  the  application  of  sound 
fiscal  principles. 

iv.  The  Remedy 

A  history  of  what  France  did  financially  during  the  war  makes 
the  remedy  obvious — a  reversal  of  the  war  policies  is  the  logical 
course.  The  country  must  retrace  its  steps.  It  must  reduce  the 
bank  advances,  it  must  fund  the  floating  debt,  it  must  make  provi- 
sions for  sinking  the  war  loans.  How  may  this  be  done?  On  the 
assumption  that  the  condition  is  not  beyond  remedy,  there  must  be 
further  progress  along  the  sound  and  sane  lines  which  were  adopted 
in  the  middle  of  the  war, — an  increase  of  direct  taxes  based  on  the 
principle  of  ability  to  pay.  The  war  profiteers  must  be  made  to 
pay  to  the  limit  the  expenses  of  the  war.  Perhaps  some  legal 
method  might  be  devised  to  restore  to  the  state  the  right  to  tax 
incomes  on  internal  loans  which  it  so  thoughtlessly  forfeited  during 
the  war.  Then,  only,  will  payment  on  the  internal  debt  become  a 
bookkeeping  transfer  of  funds.  France,  crushed  but  not  broken, 
has  made  remarkable  progress  toward  industrial  recovery  and  fiscal 
reform.  Applied  to  her  fiscal  problems,  the  courage  and  the  re- 
sourcefulness she  displayed  during  the  war  will  surely  solve  her 
financial  problems  in  the  future. 

V.   The  Outlook 

(a)   The  Indemnity — 

The  estimate  of  war  damages  varied  considerably.  Deputy 
Louis  Dubois  reported  that  the  damage  done  to  the  invaded  depart- 
ments amounted  to  fr.  119,000  million,  the  damage  to  agriculture 
fr.  37,000  million  and  military  expenses,  pensions,  etc.,  fr.  44,000 
million  or  a  grand  total  of  fr.  200,000  million.^ 

•*In  Economiste  Frangais,  March  8,  1919,  p.  301,  a  low  estimate  is  made 
of  fr.  119,801  million. 


FRENCH   PUBLIC   FINANCE  1 29 

On  the  other  hand  Rene  Pupin,  a  noted  economist,  estimated 
the  property  loss  in  the  invaded  regions  at  about  15,000  million  to 
20,000  million  francs,  and  J.  M.  Keynes,  representing  the  British 
Treasury  at  the  Peace  Conference,  independently  estimated  the 
damage  at  about  fr.  12,500  million. ^^  Mr.  Pupin  also  adds  the 
loss  of  foreign  investments,  losses  of  rolling  stock,  ships  and  live- 
stock, and  the  loss  of  the  annual  savings  and  arrives  at  a  grand 
total  loss  of  77,000  million  to  87,000  million  francs.  The  estimate 
of  the  French  section  of  the  Reparation  Commission  for  war 
damages  in  France  w^as  fr.  62,043  million.  In  contrast  with  these 
figures  Is  the  German  estimate  of  the  indemnity  due  to  France  of 
approximately  mk.  7,228  million,  submitted  in  a  statement  by  Ex- 
President  Poincaire,  head  of  the  French  section  of  the  Reparation 
Commission. ^^  The  amount  of  the  indemnity  vv^as  fixed  at  mk. 
132,000  million,  of  which  France  was  to  get  52  per  cent. 

The  immediate  financial  outlook  in  France  depends  upon  the 
amount  realized  on  the  indemnity.  The  terms  of  the  Treaty  of 
Peace,  if  they  could  be  carried  out,  would  assure  a  bright  future 
and  a  speedy  recuperation  of  France.  Under  the  financial  clauses 
of  the  treaty  France  was  to  obtain  before  May  I,  1 921,  in  addition 
to  the  railway  materials,  agricultural  appliances,  and  other  property 
conveyed  as  restitution,  a  part  of  the  mk.  20,000  million  in  gold 
demanded  of  Germany,  a  portion  of  an  issue  of  gold  bonds  of  mk. 
40,000  million  bearing  2  per  cent  interest,  a  part  of  the  German 
ship  tonnage  and  of  the  German  stocks  of  dyes,  a  part  of  the 
7,000,000  tons  of  coal  to  be  conveyed  annually  for  a  period  of  ten 
years,  the  repayment  of  the  cost  of  the  army  of  occupation,  a  pro- 
portion of  the  German  interests  in  Russia,  the  right  to  sequester 
all  German  property  in  Morocco,  and  a  mandate  over  a  part  of  the 
German  colonies.  Alsace-Lorraine  was  returned  to  France  free  of 
all  debt.  After  May  i,  1921,  France  was  to  have  the  right  to  claim 
full  reparation  for  all  damage  done  to  property  in  France  during 
the  war,  and  the  payment  of  the  cost  of  all  pensions  and  soldiers' 
allowances.  On  the  other  hand,  Germany  was  to  make  formal 
acknowledgment  of  the  reparation  debt  to  the  Allies,  was  to  forfeit 
the  right  to  dispose  of  her  gold,  and  was  to  denounce  all  treaties 


"Keynes,  J.  M.    Economic  Consequences  of  the  Peace,  pp.  124,  127. 
Ren6  Pupin,  Economiste  Frangais,  October  19,  1918. 
"Le  Matin,  August  2,  1920. 


130        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

concluded  by  her  prior  to  19 14  and  to  enact  legislation  to  facilitate 
the  execution  of  the  treaty. ^^ 

The  future  of  France  depends  upon  the  extent  to  which  the 
Allies  help  her  rebuild  the  devastated  areas.  This  is  a  just  and 
undeniable  claim.  Many  Frenchmen  believe  that  "German  obliga- 
tions to  France  must  be  made  negotiable  by  the  Allies  before 
Germany  actually  pa3S,  else  all  the  taxation  of  Frenchmen  to  the 
limit  and  the  issue  of  French  loans  to  the  limit  will  not  put  France 
on  her  financial  feet  again."  Two  unsuccessful  bids  for  inter- 
Allied  cooperation  were  put  forward  at  the  Hythe  Conference. 
On  May  16,  1920,  the  suggestion  was  made  that  the  French  debt 
to  the  United  States  be  transferred  to  Germany  partly  by  the 
issuance  of  German  bonds  to  the  United  States.  This  tentative 
plan  was  abandoned  owing  to  the  lack  of  consent  of  the  United 
States.  A  proposal  of  a  loan  based  on  the  German  debts  and 
underwritten  by  the  United  States  and  Great  Britain  also  failed 
of  acceptance. 

In  spite  of  the  obvious  difficulty  Germany  is  having  in  solving 
her  own  financial  problems  and  of  her  present  inability  to  pay  any 
substantial  indemnity  to  France,  the  French  still  count  on  large 
German  indemnity  payments.  Almost  half  of  the  1920  budget,  fr. 
22,000  million,  consists  of  "expenses  recoverable  under  the  Treaty 
of  Peace."  If  Germany  does  not  pay,  the  recuperation  of  France 
will  be  a  very  slow  process. 

(b)    The  Future  Budget — 

The  so-called  ordinary  budget  for  the  year  1920  calls  for 
revenues  of  about  fr.  22,000  million,  the  extraordinary  budget  for 
fr.  5,000  million,  and  the  special  budget  for  the  rebuilding  of  the 
devastated  areas,  etc.,  for  about  fr.  20,000  million.  The  revenue 
for  1920  failed  to  meet  the  ordinary  budget,  that  is  the  normal 
and  permanent  expenditures.  Charles  Gide,  in  the  Economic 
Journal  for  September,  191 9,  estimated  that  the  future  normal 
budget  would  be  fr.  22,000  million,  exclusive  of  the  sinking-fund 
requirements.  The  extent  to  which  this  charge  would  increase  the 
budget  depends  upon  the  rate  of  conversion  of  the  loans  and  upon 
the  amortization  of  the  debt  of  over  fr.  200,000  million.  There 
may  be  some  reduction  in  the  ordinary  budget  as  time  goes  on,  for 

"  Finance  Minister  Klotz  in  the  Chamber  of  Deputies,  in  debate  on 
the  ratification  of  the  Treaty  of  Peace,  September  15,  191 9. 


FRENCH    PUBLIC    FINANCE  13I 

the  Ministry  of  Finance  appointed  a  Committee  of  Inquiry,  the 
aim  of  which  is  to  help  reduce  public  expenditures,  within  the  limits 
of  available  revenues,  if  possible.^^  Again  as  deflation  sets  in,  the 
state  can  dispense  with  subsidies  to  lower  the  cost  of  living.  In 
the  three  years  191 7-1 919  the  wheat  subsidy  amounted  to  fr.  4,500 
million  and  in  1 920,  owing  to  the  fall  in  the  value  of  the  franc, 
the  bread  subsidy  amounted  to  fr.  3000  million.  As  a  result  of 
increases  in  taxation  France  probably  will  be  able  to  find  sufficient 
revenue  to  meet  the  so-called  ordinary  budget  in  the  future. 

In  the  words  of  the  chairman  of  the  French  Budget  Commis- 
sion, "if  the  Allies  did  not  leave  France  to  bear  the  expenditure 
chargeable  to  Germany,  France  would  experience  no  serious  finan- 
cial difficulties  in  years  to  come,  provided  that  the  ordinary  budget 
was  immediately  adjusted  by  means  of  taxation  and  economics."^^ 
According  to  Senator  Andre  Cheron,  "it  is  a  question  of  life  and 
death  for  France.  If  Germany  does  not  pay  the  problem  is 
insoluble."  *°  Ex-President  Poincare  said  equally  bluntly,  "if 
France  does  not  obtain  financial  reparations  next  year,  she  runs  the 
risk  of  bankruptcy." 

(c)    The  French  Diagnosis — 

The  French  have  not  hesitated  to  face  their  financial  situation. 
M.  Peret,  chairman  of  the  Budget  Commission  of  the  Chamber 
of  Deputies,  stated  this  situation  candidly,  *^  "Where  are  we  going 
to  get  the  money?  All  we  know  is  the  total  of  the  bill.  The 
Allies  will  aid  us  when  they  are  convinced  that  we  are  determined 
to  demand  sacrifices  of  the  French  people.  The  success  of  our 
financial  arrangements  with  England  and  America  depends  upon 
the  reshaping  of  our  internal  finances." 

The  Minister  of  Finance,  M.  Frangois  Marsal,  in  an  address 
to  the  Chamber  said,  "Despite  our  efforts,  there  is  a  feeling  of 
distrust  abroad  about  our  power  to  restore  the  national  finances. 
This  mistrust  is  responsible  for  the  high  rate  of  exchange.  Nations 
which  never  doubted  our  ability  to  win  the  war  are  now  doubting 
whether  we  shall  win  the  economic  struggle  which  began  at  the 

"'A  decree  of  March  14,  1920. 
''Journal  Officiel,  Chambre,  April  10,  1920. 
*"  Journal  Officiel,  Senat,  March  17,  1921. 

^'See  also  Allix,  Edgard,   De   I'urgence   d'un  programme  financier  et 
economique.  Revue  Politique  et  Parlementaire,  Feb.  10,  1920,  pp.  291  et  seq. 


132         INTERNATIONAL      FINANCE    AND    ITS    REORGANIZAION 

signing  of  peace.  Foreign  treasuries  are  closed  to  us  and  we  can 
not  consider  the  possibility  of  raising  an  important  loan  abroad."  *^ 
M.  Paul  Doumer,  in  a  report  to  the  Senate  in  behalf  of  the 
Commission  on  the  Budget,  May  i8,  1920,  called  attention  to  the 
fact  that  the  government  had  done  nothing  to  improve  the  critical 
financial  situation.  "It  has  lived,  ever  since  the  termination  of 
the  war,  on  the  glory  of  France.  The  world  has  entire  faith  in 
France  but  is  losing  confidence  in  her  administration."  *^ 

(d)    The  American  View — 

With  sentiments  of  generosity  toward  a  brave  and  suffering 
people,  many  American  observers  stressed  the  psychological  traits 
of  the  French  as  a  sure  factor  making  for  the  restoration  of  her 
pre-war  economic  prestige.**  In  the  words  of  an  authoritative 
writer  on  financial  problems,  "How  will  France  emerge  from  the 
terrific  economic  strain  of  the  present  war?  On  that  question  we 
have  some  historical  precedent  to  guide  us.  France,  three  times 
in  the  past  two  centuries,  has  been  completely  defeated  and  left  in 
a  state  of  seeming  economic  exhaustion — at  the  end  of  the  long 
campaign  of  Louis  XIV,  the  final  overthrow  of  Napoleon,  and  at 
the  crushing  climax  of  the  Franco-Prussian  conflict.  After  each  of 
these  experiences,  the  world  witnessed  the  extraordinary  spectacle 
of  France  promptly  resuming  her  place  in  the  economic  system, 
and  in  the  end  displaying  a  tangible  economic  power  even  greater 
than  before.  It  is  impossible  that  this  should  have  occurred  with- 
out the  possession  of  the  national  qualities  of  which  her  enemies 
have  failed  to  take  account.  If  so,  it  is  difficult  to  imagine  the 
France  of  the  longer  economic  future  occupying  in  the  economic 
system  any  different  position  than  she  has  occupied  in  the  past."  *^ 

The  friends  of  France  do  her  an  ill  turn  in  veiling  the  truth. 
The  defeat  of  France  in  the  Napoleonic  Wars  marked  the  final 
surrender  of  world  supremacy  to  England,  after  a  struggle  lasting 
half  a  century.     After  the  Franco-Prussian  War,  France  yielded 

*^  Economiste  Frangais,  January  29,  1920. 

"See  also  Raffalovich,  Arthur,  Des  dettes  d'Etat  et  de  leur  liquidation, 
Les  Discussions  de  la  Societe  d'Economie  Politique  de  Paris,  Jan.  5,  1920. 

"Laughlin,  J.  Laurence,  Credit  of  the  Nations,  New  York:  Scribners, 
1918,  pp.  193,  196. 

"Noyes,  A.  D.,  Financial  Chapters  of  the  War,  New  York:  Scribners, 
1916,  pp.  205-6.  It  should  be  noted  that  this  was  written  early  in  the  war 
before  the  debt  grew  so  large. 


FRENCH   PUBLIC    FINANCE  I33 

second  place  to  rapidly  growing  Germany.  The  outcome  of  the 
World  War  is  in  doubt.  France  and  Germany  as  well,  face  the 
relentless  natural  law  that  wars,  frequent  or  long  protracted, 
debilitate  a  nation.  History  is  strewn  with  the  wrecks  of  exhausted 
military  powers. 

With  a  supreme  national  effort,  France  will  undoubtedly 
revive.  She  needs,  primarily,  peace,  prolonged  peace.  Further  she 
must  increase  her  population,  and  not  rely  on  foreign  alliances,  or 
on  militarizing  her  African  colonials  to  redress  the  imbalance  of 
population  in  Europe.  She  must  invest  her  savings,  not  in  second- 
rate  governments  but  in  developing  domestic  industries,  and  stimu- 
late essential  rather  than  luxury  production.  As  her  publicists, 
Victor  Boret,  Edouard  Herriot  and  Henri  Hauser  have  pointed 
out,  France  must  apply  the  principles  that  changed  Germany  from 
an  inferior  power  in  1870  to  a  dominant  factor  in  world  politics 
in  1914. 

Many  of  the  optimistic  forecasts  failed  to  take  into  account 
that  a  large  part  of  the  French  debt  is  held  abroad,  that  a  large 
part  of  the  remainder  is  a  floating  debt,  and  that  the  income  of 
internal  war  loans  is  exempt  from  taxation.  And  even  if  the 
income  from  war  loans  were  taxable,  the  redistribution  of  taxes  in 
the  form  of  interest  is  always  a  difficult  and  sometimes  a  wasteful 
economic  process.  Furthermore  as  the  enormous  note  issues  of  the 
Bank  of  France  are  retired  and  deflation  sets  in,  the  burden  of  the 
debt,  that  is  the  cost  in  goods,  will  increase  unless  the  debt  is 
converted  and  the  interest  reduced.  Some  Frenchmen  pointed  to 
the  remarkable  expansion  of  the  United  States  after  the  Civil 
War.*^  However,  they  overlook  the  fact  that  the  South,  lacking 
financial  help,  had  barely  overcome  the  effects  of  the  war  after  a 
generation,  and  that  the  North  thrived  only  because  of  the  opening 
of  the  agricultural  west  to  the  great  migrations  of  European 
peoples.  Without  financial  help,  France  like  our  South  will 
recuperate  slowly  and  even  then  her  recovery  will  be  conditional 
on  an  increase  of  population.  The  colonial  empire  of  France, 
with  its  black  inhabitants,  has  not  the  inherent  potentialities  of 
development  of  our  western  states,  which  became  peopled  with 
vigorous  white  stock. 

However,  the  record  of  France  in  the  year  after  the  war  is 

**  Casenave,    Maurice,    The    French    Situation,    Proceedings    of    the 
Academy  of  Political  Science,  iv.  i:  104,  June,  1920. 


134        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

an  earnest  of  her  future  recovery.  The  rapid  increase  of  tax 
revenues,  the  speedy  restoration,  under  great  difficulty  and  without 
well-deserved  assistance,  of  her  agriculture  and  industry,  the 
amortization  of  over  fr.  2,000  million  since  the  armistice,  indicate 
the  possibilities  for  improvement,  if  the  French  but  will  it.  Under 
a  vigorous  ministry,  the  financial  situation  may  be  improved  by  a 
heroic  liquidation  of  the  inflated  currency,  by  a  funding  of  the 
floating  indebtedness,  and  by  the  adoption  of  a  scheme  of  direct 
taxation  which  will  be  imposed  in  accordance  with  the  ability  to 
pay  and  therefore  in  proportion  to  the  productivity  of  the  source. 
Perhaps  the  realization  of  the  futility  of  the  hope  of  obtaining  the 
expected  huge  indemnity  from  crushed  and  impoverished  Germany 
will  be  the  first  step  toward  developing  that  self-reliant  financial 
policy  in  France  which  is  the  basis  of  all  credit  and  is  essential  to 
the  salvation  of  any  nation. 

A  very  sober  prognosis  was  given  by  a  noted  French  economist 
at  the  conclusion  of  a  study  of  French  war  finance.  "The  financial 
and  economic  future  of  France  is  gloomy.  But  the  vigor  of  the 
French  people  is  great,  as  their  history. shows;  and  their  spirit  of 
economy  and  thrift  is  traditional.  In  spite  of  the  enormous  diffi- 
culties which  seem  to  stand  in  the  way  of  her  recovery,  the  French 
nation  will  come  out  of  the  terrible  trials  she  has  experienced, 
triumphant.  That  triumph,  no  doubt  will  be  a  matter  of  many 
long  years."  *'' 

"  Jhzt,  Gaston,  The  Economic  and  Financial  Position  of  France  in 
1920,  Quarterly  Journal  of  Economics,  XXXV:  i,  February,  1921,  p.  210. 


CHAPTER  IV 

GERMAN  PUBLIC  FINANCE  ^ 

A.  Cost  of  the  War  and  Public  Debt 

i.  National  Wealth  and  National  Debt  Before  the   War 

In  view  of  the  fact  that  the  debt  of  Germany  after  the  war 
constitutes  over  6o  per  cent  of  the  money  estimates  of  national 
wealth  of  Germany  before  the  war,  the  pre-war  estimates  are  of 
interest.  In  191 1  Helfferich,  the  former  Minister  of  Finance,  and 
Ballod,  a  noted  statistician,  independently  set  the  amount  at 
about  mk.  360,000  million.^  J.  C.  Stamp,  the  English  statistician, 
accepts  Helferrich's  figure. 

At  the  outbreak  of  the  war,  Germany  had  the  lowest  debt  of 
any  of  the  major  belligerents  then  engaged,  approximately  $17.00 
per  capita.  The  figure  for  the  United  States  in  19 17  was  $11.33 
per  capita. 

'  Bibliography: 
Official— 

Vierteljahrshefte  zur  Statistik  des  Deutschen  Reichs. 

Statistisches  Jahrbuch  fiir  das  Deutsche  Reich. 

Deutscher  Reichs-Anzeiger  und  koniglich  preussicher  Staats-Anzeiger. 

Reichshaushalts-Etat.   (Annual).     Budget  details. 

Stenographische  Berichte  iiber  die  Verhandlungen  des  Reichstags, 
addresses  of  Ministers  of  Finance  Kuhn  1914-15,  Helfferich  1915-16, 
Von   Roedern   1916-18,   Schiffer   1918-19,   Erzberger   1919-20,   Wirth   1920. 

Reichs-Gesetzblatt,  a  chronological  and  indexed  record  of  legislation. 

Semi-official — 

Finanz-Archiv. 

Volkswirtschaftliche  Chronik. 

Frankfurter  Zeitung. 

Schmoller's  Jahrbuch  fiir  Gesetzgebung,  Verwaltung  und  Volkswirt- 
schaft  im  Deutschen  Reiche. 

Die  Bank. 

Berliner  Boersen  Courier. 

Deutscher  Okonomist. 

^Helfferich,  Karl,  Deutschlands  Volkswohlstand,  1888-1913.  Berlin: 
G.  Stilke,  1913. 

135 


136        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  low  per  capita  debt  of  Germany,  compared  to  the  other 
powers,  was  due  to  the  comparatively  recent  birth  of  the  Empire. 
However  the  increase  in  the  debt  was  not  insignificant  in  the 
generation  before  the  war.  After  1886,  when  certain  expenses 
could  no  longer  be  met  out  of  current  revenue,  they  were  separately 
stated,  as  an  extraordinary  budget,  and  were  covered  by  borrowing. 
The  subsequent  growth  of  the  imperial  funded  debt  was  rapid. 
But  as  productive  assets  were  acquired  by  the  state,  the  debt  was 
less  of  a  burden  than  it  would  seem.  In  fact,  profits  on  government 
owned  railroads  were  sufficient  before  the  war  to  pay  the  interest 
and  sinking  fund  charges  on  the  entire  imperial  debt. 


Imperial  FtnsfDED  Debt  ' 


Year 

Total, 

Per  capita, 

million  marks 

marks 

1877 

72.2 

1.66 

1881 

267.8 

5-90 

1891 

1317.8 

26.56 

1 901 

2395-7 

42.29 

1908 

4003.5 

63.78 

1913 

4802.2 

70.75 

Owing  to  the  federal  form  of  organization  and  to  the 
inadequacy  of  imperial  revenues,  the  states  contributed  out  of  their 
revenue  to  the  budget  of  the  empire  from  1872  to  1878  and  again 
after  1 899.  The  debts  of  the  states  and  municipalities  of  Germany 
also  grew  rapidly  before  the  war. 


Imperial  St.^te  and  Municipal  Debts 
(in  million  marks) 


Year 

Empire 

States 

Municipalities 

Total 

1881 
1908 
1913 

268 
4003 
4802 

5.244 
14,362 
17,700 

772 

5.296 

11,900 

6,284 
23,661 
34,402 

•  Hirst,  F.  W.  and  Bastable,  C.  P.,  ibid. 

Wurm,  E.,  Die  Finanzgeschichte  des  deutschen  Reichs,  191a 


GERMAN  PUBLIC   FINANCE 


137 


ii.   The  War  Debt  of  the  States  and  Cities 

The  constitutional  division  of  powers  between  the  Empire  and 
the  federal  states  denied  the  Imperial  Government  the  right  to  levy 
an  income  tax,  and  many  expenditures  for  national  purposes  were 
borne  by  the  federal  states  and  cities,  such  as  the  cost  of  social 
service  during  the  war.  Up  to  the  end  of  1916  eight  Saxon  cities 
had  incurred  a  war  debt  of  about  mk.  250  million,  and  the  war 
expenses  of  the  cities  of  Saxony  having  more  than  five  thousand 
population  amounted  to  about  mk.  400.  Leipzig  alone  had  spent 
over  mk.  lOO  million  for  war  relief  up  to  the  first  of  October, 
191 7.  As  a  result  of  the  increase  of  the  local  debts,  state  and  city 
taxes  were  heavily  increased,  and  in  some  cases  it  was  necessary 
to  raise  the  tax  limit  in  order  to  meet  debt  charges.  Even  during 
the  war,  the  cities  had  been  urging  the  assumption  of  their  debts 
by  the  Empire  and  in  view  of  the  fact  that  the  new  constitution 
grants  the  Empire  the  right  to  levy  an  income  tax,  in  competition 
with  the  federal  states  and  cities,  the  pressure  for  the  assumption 
of  local  debts  by  the  Empire  is  increasing.  Discussion  of  the  debt 
of  Germany  should  therefore  take  into  account  the  debts  of  the 
municipalities  and  of  the  federal  states  as  well  as  of  the  Empire.* 


iii.    The  Growth  of  the  Debt 

The  expenditures  of  each  year  increased  as  a  result  of  the  larger 
scale  of  operations  and  of  the  depreciation  of  the  currency.  The 
expenditures  during  the  war  were  given  by  Dr.  Schiffer,  Minister 
of  Finance,  in  an  address  to  the  German  National  Assembly  at 
Weimar,  February  15,  19 19: 


Year 

Million  marks 

1914 

191S 
1916 
1917 
1918 

Total.  ... 

7,500 
23,000 
26,600 
39,500 
48,500 

145,100 

*Leip2iger  Neueste   Nachrichten,   January  15,   1918.     Also   Laughlin, 
ibid.,  pp.  263-4. 


138 


INTERNATIONAL    FINANCE    AITO    ITS    REORGANIZATION 


In  addition  mk.  6,000  million  of  treasury  bonds  were  issued  and 
mk.  9,500  million  of  credits  were  extended  to  the  allies  of  Germany, 
making  a  total  of  mk.  160,600  million  up  to  the  end  of  191 8. 

The   rate  of  increase  may  be   seen   from   a   table  of  average 
monthly  war  expenditures  given  in  marks  as  well  relatively: 

Average  Monthly  War  Expenditures 


Period 

Million  marks 

Relative  figures 

Aug.  I,  1914-June  30,  1915 
July  I,  1915-June  30,  1916 
July  I,  1916-June  30,  191 7 
July  I,  1917-June  30,  1918 
July  I,  1918-Dec.  31,  1918 

1675 
2008 
2867 
3908 
4358 

100 
120 
171 
233 

260 

By  the  autumn  of  191 8  mk.  139,000  million  were  voted  in 
twelve  war  credits,  as  follows  (the  revolution  in  November,  1 918, 
prevented  the  passing  of  the  vote  of  credit  of  mk.  15,000  million, 
proposed  in  October) : 

War  Credits  Voted  August,  1914,  to  Nox'ember,  1918 


No. 

Date  of  vote 

Million  marks 

1 

Aug.     I,  1914 

S,ooo 

2 

Dec.     3,  1914 

S,ooo 

3 

Mar.  22,  1915 

10,000 

4 

Aug.  31,  1915 

10,000 

S 

Dec.  24,  1915 

10,000 

6 

June    9, 1916 

12,000 

7 

Oct.   30,  1916 

12,000 

8 

Feb.  23,  1917 

15,000 

9 

July     7,  191 7 

15,000 

10 

Dec.     I,  1917 

15,000 

II 

Mar.  10,  1918 

15,000 

12 

July     4, 1918 

15,000 

Dr.  Schiffer  gave  the  total  debt  at  the  end  of  19 1 8,  as  mk. 
157,700  million  of  which  about  mk.  59,000  million  was  floating.^ 
During  the  year  191 9  the  increase  in  the  debt  was  about  mk,  50,000 
million,  entirely  in  the  floating  debt.  On  March  31,  1920,  the 
funded  debt  of  Germany  amounted  to  mk.  92,000  million,  and  the 
floating  debt  totaled  mk.  105,000  million,  according  to  a  statement 

'Address  at  Weimar,  April  9,  1919. 


GERMAN  PUBLIC  FINANCE 


139 


of  Dr.  Wirth,  Minister  of  Finance,  to  the  Budget  Committee  of  the 
National  Assembly.^ 

The  floating  debt  was  mk.  132,100  million  on  June  30,  1920, 
and  mk.  169,000  million  on  October  31,  1920.  The  total  debt  on 
September  18,  1920,  was  mk.  242,700  million,  made  up  as  follows: 


Million  marks 

Funded  debt 

91,000 

132,300 

19,400 

Treasury  bills  

Other  obligations 

Total 

242,700 

To  this  must  be  added  the  Prussian  state  debt  of  mk.  25,200 
million,  consisting  of  mk.  10,600  million  of  funded  debt  and  mk. 
14,600  million  of  unfunded  debt,  which  the  Empire  assumed  upon 
the  surrender  of  the  Prussian  railways.  The  Empire  also  owed 
mk.  18,000  million  to  the  states  for  expenses  on  relief  and  social 
work.  The  resulting  grand  total  is  mk.  285,900  million.  Until 
the  end  of  19 16,  the  floating  debt  was  comparatively  small,  for 
it  had  been  retired  by  funds  raised  in  long-term  loans.  During 
the  latter  part  of  the  war  and  after  the  signing  of  the  armistice, 
the  floating  debt  grew  by  leaps  and  bounds,  because  of  the  impos- 
sibility of  raising  adequate  funds  from  the  long-term  loans.  To 
the  total  debt  must  be  added  mk.  131,000  million  to  be  paid  to 
Germans  as  compensation  for  losses,  such  as  seized  property  and 
merchant  ships  surrendered. 


Losses  Under  the  Treaty  of  Peace  ^ 


Items 

Billion  marks 

Surrender  of  the  fleet 

17.0 
90.0 
lo-S 
13s 

Liquidation  of  German  property  abroad 

Delivery  of  war  material 

Claims  under  the  war  damage  law  of  1916 

Total  losses  to  German  citizens 

1310 

'Frankfurte:  Zeitung,  Dec.  23,  1920. 

London  Economist,  May  i,  1920. 

'  Address  of  Herr  Wirth  to  Cabinet,  Sep.  23,  19*0. 


140        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

On  May  31,  1921,  the  imperial  funded  debt  was  mk.  78,348 
million  and  the  floating  debt  was  mk.  400,000  million. 

iv.    Total  Debt  Analysed 

At  the  end  of    191 8,   the  total   debt  was  distributed   among 
expenses  approximately  as  follows:* 


Per  cent 


MiKtary  expenses 

Pensions 

Civil  food  subsidies 

Compensation  in  invaded  districts. 
Mobilization  costs,  etc 


72 

18 

6 

3 

1 


Total. 


To  the  imperial  debt  should  be  added  the  debt  of  the  federal 
states  and  of  the  local  communities  which  on  August  I,  191 7, 
amounted  to  30,000  million  marks  and  mk.  22,500  million,  respec- 
tively. 

Analysis  of  the  Total  German  Debt  * 
(in  billion  marks) 


Type 

Imperial 
debt 

State 
debt 

Municipal 
debt,  etc. 

Total 
debt 

Long-term     

92.0 
105.0 

17-5 

12.5 

12. s 

10. 0 

122.0 

Short-term 

127. 5 

Total 

197.0 

30.0 

22. s 

249 -s 

B.  Loans 

i.   The  Theory  of  German   War  Finance 

The  theory  of  German  war  finance  grew  out  of  pre-war  con- 
ditions. Since  the  Empire  lacked  the  legal  authority  to  establish 
a  broad  base  of  taxation,  the  Ministry  of  Finance  paid  little  heed 

"Estimates  of  George  Bernhard,  editor  of  Plutus,  quoted  in  the  London 
Economist,  July  27,  1919. 

'Frankfurter  Zeitung,  May  14,  1920.  Report  of  Consul  Frederick 
Simpich,  attached  to  the  American  Mission  at  Berlin,  July  14,  192a 


GERMAN   PUBLIC   FINANCE  I4I 

to  the  development  of  a  tax  policy.  Furthermore  legislation 
enabling  the  Reichsbank  greatly  to  increase  its  note  circulation 
and  authorizing  the  establishment  of  emergency  financial  institu- 
tions made  reliance  on  inflation  the  favored  means  of  financing  the 
war.  The  failure  to  impose  taxes  was  justified  as  in  France  on  the 
ground  that  it  would  have  a  bad  effect  on  war  morale  of  the  public. 
Long-term  loans  and  note  inflation  constituted  the  chief  reliance 
of  the  German  Treasury. 

The  theories  of  war  finance  of  the  three  major  European  bel- 
ligerents afford  some  interesting  parallels.  Like  France  and  Great 
Britain,  Germany  relied  upon  an  increase  in  note  issues.  Like 
France,  Germany  expected  a  short  war  and  deliberately  postponed 
the  financial  adjustments  until  the  end  of  the  war.  Neither 
adopted  the  British  and  American  policy  of  "pay  as  you  go"  in 
part.  Germany,  unlike  Great  Britain,  did  not  resort  to  heavy 
taxation  at  the  beginning  of  the  war.  Unlike  France,  Germany 
did  not  rely  on  short-term  financing  to  wage  a  supposedly  short 
war.  Until  the  fall  of  191 8,  Germany  issued  long-term  loans,  at 
precisely  timed  intervals.  She  relied  on  short-term  loans  only 
when  long-term  loans  could  not  be  sold.  Unlike  either  France 
or  Great  Britain,  Germany  in  the  very  beginning  of  the  war 
planned  to  meet  her  war  expenses  by  an  indemnity  levied  upon 
her  enemies. 

An  official  statement  of  German  policy  was  made  in  two 
addresses  by  Dr.  Helfferich  before  the  Reichstag  on  March  lO 
and  August  20,  191 5.  "The  means  of  financing  a  modern  war 
are  substantially  the  following:  First,  the  issue  of  loans;  second, 
the  use  of  the  printing  press  for  the  issue  of  notes  and  paper  money; 
third,  a  reduction  of  expenses,  and  war  taxation.  .  .  .  After  the 
conclusion  of  peace,  we  shall  present  to  our  opponents  a  bill  for 
the  expenses  of  the  war,  forced  upon  us.  We  do  not  desire  to 
increase  by  taxation  the  heavy  burden  which  war  imposes  upon 
our  people,  so  long  as  it  is  not  absolutely  necessary.  Heavy  taxes 
on  consumption  or  increased  transportation  rates  would  be  neither 
reasonable  nor  desirable  with  prices  at  their  present  level.  The 
only  method  seems  to  be  to  leave  the  settlement  of  the  war  bill 
to  the  conclusion  of  peace  and  the  period  thereafter.  Those  who 
provoked  the  war,  and  not  we,  deserve  to  drag  through  the  cen- 
turies to  come  the  leaden  weight  of  these  billions." 


142        INTERNATIONAL    FINANCE   AND   ITS    REORGANIZATION 

ii.   The  Mobilization  of  Credit  An  Accessory  to  the  Loan  Policy 

In  order  to  avoid  a  moratorium,  and  the  consequent  disorganiza- 
tion of  the  finances  of  the  country,  Germany  relied  upon  fiat  cur- 
rency and  fiat  credit  for  the  purpose  of  creating  liquid  assets  out 
of  her  capital  goods  and  of  facilitating  subscriptions  to  the  war 
loans. ^*^ 

In  mobilizing  her  credit  resources  Germany  created  four  kinds 
of  fiat  money  or  credit,  Darlehnskassenscheine,  Reichskassenscheine, 
loans  at  war  credit  banks,  and  loans  at  municipal  or  cooperative 
loan  bureaus. 

The  theory  of  German  war  finance  was  that  the  Reichsbank 
resources  were  to  be  utilized  by  the  Government  and  that  special 
war-time  institutions  should  be  created  for  extending  commercial 
credit.  The  loan  bureaus  were  authorized  to  furnish  credit  upon 
non-liquid  assets,  such  as  would  not  be  accepted  by  a  commercial 
bank.  Against  the  pledges  so  deposited  the  Darlehnskassen  issued 
notes,  which  were  receivable  for  all  public  dues.  Prof.  M.  J. 
Bonn  in  his  "German  War  Finance"  draws  a  parallel  betw^een  the 
Darlehnskassenscheine  and  the  British  currency  notes,  but  empha- 
sizes that  the  former  were  secured  by  large  margins  and  were 
collectable  by  a  levy  against  the  entire  property  of  the  borrower. 
Reichskassenscheine,  treasury  notes,  which  were  issued  in  1874 
to  meet  an  emergency,  and  the  outstanding  amount  of  which  was 
increased  in  19 13  from  120  to  240  million  marks,  were  now  made 
lawful  money  and  the  Reichsbank  was  relieved  of  its  obligation  to 
redeem  these  and  the  Reichsbank  notes  in  gold.  The  four  private 
note-issuing  banks  of  Germany  were  protected  against  the  loss  of 
their  gold  reserve  by  permitting  them  to  redeem  their  notes  with 
Reichsbank  notes. 

Fiat  credit  was  created  by  means  of  the  war  credit  banks, 
which  were  organized  throughout  the  country  by  the  cities  and 
commercial  associations,  by  which  the  obligations  of  the  banks  were 
guaranteed  and  the  losses  refunded.  These  institutions  extended 
loans  against  subscriptions  to  the  war  bonds,  against  merchandise, 
or  against  promissory  notes.  The  Reichsbank  discounted  the  bills 
of  the  war  credit  banks. 

'"Bendlx,     Ludwig,     Germany's     Financial     Mobilization.       Quarterly 
Journal  of  Economics,  pp.  725-744,  August,  1915. 


GERMAN   PUBLIC   FINANCE 


143 


Finally  the  municipal  loan  bureaus  and  the  cooperative  credit 
banks  furnished  loans  in  the  smaller  communities  against  collateral 
such  as  would  not  have  been  acceptable  at  the  loan  bureaus. 

Further  to  facilitate  subscriptions  to  war  loans,  the  government 
made  arrangements  with  the  banks  of  the  country  to  allow  4^^ 
per  cent  on  deposits  ear-marked  for  the  loan,  and  arranged  with 
the  Reichsbank  for  the  sale  of  war-loan  treasury  bills  carrying  a 
preferential  rate  of  discount  on  the  condition  that  the  proceeds 
would  be  used  to  take  up  the  war  loan. 

The  loan-bank  notes  were  not  an  important  factor  in  the  sub- 
scriptions to  the  war  loan.  Although  the  volume  of  Darlehnskas- 
senscheine  rose  from  mk.  1,317  million  on  December  3,  1914,  to 
mk.  12,911  million  on  December  7,  19 18,  the  percentage  of  the 
war  loans  paid  for  by  means  of  Darlehnskassenscheine  declined  as 
follows : 


Loan 

Per  cent  paid  in 

Darlehnskassenscheine 

ISt 

27.7 

2nd 

8.6 

3rd 

6.5 

4th 

4.8 

5th 

2.8 

6th 

2.7 

7th 

1-3 

Apparently  only  a  small  amount  of  the  loan  bank  notes  were  used 
in  payment  of  war  loan  subscriptions.^^ 


iii.   The  Issue  of  Loans 

(a)    The.  Restriction  of  Capital  Issues — 

In  order  to  insure  the  most  favorable  condition  for  the  issuing 
of  national  war  loans,  Germany  restricted  the  issue  of  securities 
for  purposes  not  essential  to  the  war.  By  an  order  of  the  Bundesrat, 
a  special  license  was  required  for  the  formation  of  joint-stock  com- 
panies or  for  an  increase  in  their  capital  involving  more  than 
mk.  300,000.^2 

"Holden,  Sir  Edward,  Annual  Report  at  the  meeting  of  the  stock- 
holders of  the  London  City  and  Midland  Bank,  January  29,  1918,  reprinted 
in  the  Statist,  February  2,  1918. 

"Berliner  Aktionar,  November  7,  1917. 


144        INTERNATIONAL   FINANCE   AND   ITS   REORGAl^IZATION 

This  legislation  resulted  in  the  marked  decline  in  the  number 
of  new  companies  floated  and  in  their  capitalization.  The  number 
of  new  companies  formed  in  1915  was  less  than  half  that  of  1914 
and  the  capitalization  was  less  than  one-fifth. 

Capital  Issues  '^ 


Year 

Number  of  new 
companies 

Capitalization 
(million  marks) 

1913 
1914 

191S 
1916 
1917  (Jyr.) 

175 
119 

58 
8g 
26 

216.81 
322. 22 

57-97 
113. 16 

47-13 

After  the  war,  the  deferred  issues  were  floated  in  great  quan- 
tities. As  a  result  of  inflation,  the  amounts  rose  enormously.  In 
1920  the  capital  issues  totaled  mk.  11,514  million,  or  lOO  times 
the   191 6  amount. 


(b)    Terms  of  Loans — 

The  distinctive  characteristics  of  the  German  loans  were,  the 
limited  number  of  types  of  loans,  the  relatively  constant  issue  price, 
the  regularity  of  the  interval  between  the  issues,  and  the  simul- 
taneous offering  of  bonds  and  treasury  bills. during  each  of  the  loan 
subscription  periods.  The  loans  uniformly  were  redeemable  at  the 
option  of  the  government  after  1924  and  the  treasury  bonds  had 
definite  maturity  dates.  The  terms  of  the  later  issues  permitted 
the  government  to  redeem  the  entire  issue  of  treasury  certificates 
at  a  premium  and  the  holder  had  the  option  of  accepting  cash  or 
a  certificate  bearing  a  lower  rate  of  interest,  but  redeemable  at  a 
higher  premium. 

To  facilitate  subscriptions  the  government  issued  special  treasury 
bills  in  anticipation  of  loans.  They  matured  on  the  day  that  install- 
ments fell  due.  Bank  deposits  earmarked  for  the  loan  bore  a 
preferred  rate  of  interest.  The  loans  were  'ssued  in  September 
and  March  from  191 4  through  191 8.  Thereafter  the  government 
had  to  rely  on  short-term  financing  and  the  use  of  paper  money 
until  the  tenth  war  loan  was  floated  in  the  fall  of  191 9.     The 

"For  capital  issues  and  listings  on  the  stock  exchange,  sec:  Die 
Bank,  and  the  Vierteljahreshefte  zur  Statistik  des  Deutschen  Reichs. 


GERMAN  PUBLIC   FINANCE 


I4S 


proceeds  of  the  war  loans  were  used  to  retire  short-term  obligations 
outstanding. 

The  schedule  of  loans  floated  during  the  war  Is  given  here- 
with: 


German  War  Loans 

No. 

Date 

Type 

In- 
terest 
rate 

Price 

Maturity 

Redeem- 
able 
after — 

Amount  in 
million 
marks 

Number 
subscrib- 
ers 

I 

Sept.,  1914 

Imperial  loan .  .  . 
Treasury  bonds. . 

S 

S 

97. 5 

97. S 

1918-20 

1924 

3,881 
1,000 

1,177,23s 

3 

Mar.,  1915 

Imperial  loan .  .  . 
Treasury  bonds. . 

s 

s 

98. S 
98. S 

1921-22 

1924 

8,331 
775 

2,694,063 

3 

Sept.,  191S 

Imperial  loan .  .  . 

5 

99 -o 

1924 

12,160 

3,966,418 

4 

Mar.,  1916 

Imperial  loan .  .  . 
Treasury  bonds. . 

S 
4S 

98.5 
95. 0 

1923-32 

1924 

9,196 
i,S73 

S.3  79,64s 

S 

Sept.,  1916 

Imperial  loan .  .  . 
Treasury  bonds. . 

S 
45 

98.0 
95.0 

1923-32 

1924 

8,826 
1,873 

3,810,696 

6 

Mar,,  1917 

Imperial  loan .  .  . 
Treasury  bonds. . 

S 

4-5 

98.0 
98.0 

1918-67 

1924 

13,122 

7,063,347 

7 

Sept.,  1917 

Imperial  loan .  .  . 
Treasury  bonds. . 

S 
4-5 

98.0 
98.0 

1917-67 

1924 

12,626 

S.2I3.373 

8 

Mar..  1918 

Imperial  loan .  .  . 
Treasury  bonds. . 

S 
4-S 

98.0 
98.0 

1919-67 

1924 

14,766 

6,510,878 

9 

Sept.,  1918 
Total 

Imperial  loan .  .  . 
Treasury  bonds. . 

S 

4-5 

98.0 
98.0 

1919-67 

1924 

10.434 

i.7i7.6S7 

98,563 

From  the  sixth  to  the  ninth  Issue,  treasury  certificates  were 
redeemable  by  drawing  In  series  In  January  and  July  at  IIO. 
Treasury  certificates  not  drawn  for  payment  by  lot  are  neither 
redeemable  nor  convertible  Into  other  issues  until  1927  when  the 
government  has  the  option  to  redeem  the  outstanding  amount  at 
par.  If  the  government  exercises  this  option,  the  holder  may  obtain 
cash  or  4  per  cent  treasury  certificates  redeemable  at  1 1 5.  Ten 
years  later  the  government  reserves  the  right  to  call  the  then  out- 
standing 4  per  cent  treasury  certificates,  in  which  case  the  holder 
may  obtain  cash  or  3j^  per  cent  treasury  certificates  redeemable 
by  drawings  at  120.  Thereafter  the  government  has  no  further 
right  to  redeem  or  offer  conversion  privileges.  The  certificates 
mature  July  i,  1967,  on  which  date  certificates  outstanding  shall 
be  paid  at  no,  115,  or  120  according  as  the  certificates  bear  4j4, 
4,  or  3^  per  cent  Interest. 


146        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

(c)    The  Lottery  Loan — 

Subsequent  to  the  cessation  of  hostilities  German  credit  was  so 
badly  shaken  that  it  was  impossible  to  float  a  long-term  loan.  The 
financing  after  the  armistice  was  in  the  form  of  short-term  bills 
and  increases  in  paper  circulation.  In  order  to  reduce  the  paper 
circulation  Erzberger,  the  Minister  of  Finance,  undertook  to  issue 
a  lottery  loan  in  November,  1 91 9.  The  amount  offered  was  mk. 
5,000  million  payable  one-half  in  cash  and  one-half  in  5  per  cent 
war  loans.  No  annual  interest  was  payable,  but  instead  a  bonus 
of  5  per  cent  per  annum  which  is  payable  when  the  certificate  is 
drawn  for  payment.  Drawings  will  be  held  twice  yearly  for  eighty 
years.  The  prizes  will  be  2,500  in  number  and  mk.  25  million  in 
amount,  and  will  vary  from  mk.  1,000  to  mk.  1,000,000.  At  the 
end  of  twenty  years,  subscribers  may  demand  payment,  at  the  face 
value  plus  accrued  interest. 

The  lottery  loan  was  not  a  success.  The  ninth  war  loan 
brought  in  subscriptions  of  over  mk.  10,000  million,  whereas  the 
lottery  loan  procured  only  mk.  3,818  million.  The  loan  did  not 
appeal  to  the  investing  public  because  of  the  other  speculative 
opportunities  at  hand.  Over  79  per  cent  of  the  total  number  of 
subscriptions  was  obtained  from  investors  in  one  or  two  shares. 
The  loan  did  not  accomplish  the  object  of  reducing  the  floating 
debt,  which  increased  from  mk.  80,200  million  to  mk.  83,100 
million  during  the  very  period  of  subscription.  The  recognition 
of  the  poor  condition  of  the  national  credit  led  to  the  proposal  to 
float  a  lottery  loan  and  its  failure  demonstrated  the  collapse  of 
German  credit  at  home. 


C.  War-Time  Taxation 

i.  Taxation  Policy 

Before  the  war,  a  special  levy  was  imposed  for  military  pur- 
poses, the  Wehrbeitrag,  a  non-recurrent  tax  on  property  and  income 
in  1913.  But  the  carefully  prepared  plans  of  financial  mobilization 
did  not  include  provisions  for  war  taxes.  In  fact,  an  expected  short 
and  victorious  war,  the  expenses  of  which  were  to  be  paid  by  an 
indemnity,  should  not  require  any  extensive  taxation.  The  Empire 
and  the  federal  states  raised  loans  and  increased  their  debts,  but  in 
the  early  period  of  the  war  did  not  cover  the  growing  interest 


GERMAN   PUBLIC   FINANCE  147 

charges.  The  prolongation  of  the  war  made  the  delay  in  levying 
taxes  embarrassing.  Whereas  in  19 1 3  the  total  taxes  constituted 
81.8  per  cent  of  total  expenditures,  the  ratio  in  the  calendar  year 
19 1 4  was  27.8  per  cent,  and  in  1915  the  ratio  was  6.9  per  cent. 
In  1916  the  deficit  in  the  ordinary  budget,  excluding  military  ex- 
penses, was  about  480  million  marks.  The  19 17  budget  showed  a 
deficit  of  1,250  million  marks,  and  the  19 18  budget  a  deficit  of 
2878  million  marks.^* 

The  government  subsequently  enunciated  the  policy  that, 
whereas,  the  expenses  of  the  war  would  be  financed  through  the 
issue  of  bonds  and  treasury  notes,  the  ordinary  or  current  expenses, 
including  the  interest  on  the  war  debt,  would  be  met  by  taxation. 
At  first  the  tax  measures  adopted  were  makeshifts  and  were  to  last 
during  the  war  only.  However,  as  the  budget  needs  grew  the 
government  was  compelled  to  undertake  a  thorough-going  program 
of  financial  legislation. 

ii.  Principles  of  Taxation 

The  freedom  of  the  Imperial  Government  in  formulating  a 
tax  policy  was  restricted  by  political  considerations,  the  reservation 
of  income  taxes  to  the  federal  states. ^^  The  failure  of  the  Empire 
to  levy  direct  taxes  or  taxes  on  personal  incomes  during  the  early 
part  of  the  war,  and  its  reliance  on  indirect  taxes  were  severely 
criticized  by  the  liberal  papers,  who  lauded  the  British  tax  scheme 
for  its  justice  to  the  working  classes.  The  opposition  in  Germany 
to  an  Imperial  income  tax  was  due  to  the  junkers'  fear  of  its  liberal 
use  by  the  popularly  elected  Imperial  Reichstag  and  their  confidence 
in  the  undemocratically  constituted  diets  of  the  federal  states. 

iii.   Taxes  Enacted  ^^ 

(a)  War  Increment  Tax — 

The  Imperial  war  tax  of  June  21,  1916,  was  a  tax  on  property 
increments  during  the  years  191 5  and  1916. 

"Program  of  New  Imperial  Taxation,  British  Board  of  Trade 
Journal,  May  9,  1918,  p.  584.  Count  von  Rodern's  budget  speech,  April 
17,  1918. 

'^Zimmerman,  F.  W.  R.,  Die  Finanzwirtschaft  des  Deutschen  Reichs. 
Berlin:    1916. 

"Ballod,  Karl.  Die  Reichssteuervorlagen  von  Marz,  1916.  Schmollcrs 
Jahrbuch,  1916,  xl,  pp.  977-990. 


148        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  taxes  applied  to  persons  whose  property  had  not  varied 
even  by  lO  per  cent  during  this  period.  The  tax  was  in  effect  a 
property  tax  rather  than  an  increment  tax.  The  Act  of  April  9, 
19 1 7,  supplemented  the  extraordinary  non-recurring  war  levy  and 
increased  its  yield  by  20  per  cent.  On  July  6,  191 8,  a  levy  on 
excess  income  and  on  property  was  imposed  to  cover  the  increase 
between  the  valuations  in  1914  and  191 8.  Increases  of  income  of 
less  than  mk.  3,000  were  exempt.  For  the  first  mk.  10,000  of 
increased  income  the  tax  was  5  per  cent,  for  the  next  mk.  10,000 
10  per  cent,  for  the  next  mk.  30,000  20  per  cent,  for  the  next  mk. 
50,000  30  per  cent,  for  the  next  mk.  100,000  40  per  cent,  and 
for  additional  amounts,  that  is,  above  mk.  200,000,  it  was  50  per 
cent. 

The  property  tax  was  also  graduated.  Properties  under  mk. 
100,000  were  tax  exempt.  The  rate  was  graduated  from  i  per 
1,000  on  the  first  mk.  200,000  up  to  5  per  1,000  on  properties  ex- 
ceeding mk.  2  million. 


(b)  Company  Profits  Tax — 

The  Act  of  June   16,   191 6,  required  taxable  corporations  to 
form  a  war  reserve  of  60  per  cent  of  the  excess  profits  earned. 


(c)  Other  Federal  Taxes — 

A  series  of  acts  passed  in  June,  19 16,  provided  for  increases  in 
postal  and  telegraph  rates,  in  taxes  on  tobacco  and  tobacco  products, 
on  railway  rates  and  bills  of  lading,  and  for  a  tax  on  sales  of  over 
mk.  3000  at  the  rate  of  one  per  mill.  As  the  need  for  revenue 
increased  the  Reichstag  passed  further  tax  measures  with  record 
speed  in  March  and  April,  191 7.  The  sum  of  mk.  100  million  of 
the  profits  of  the  Reichsbank  was  made  payable  to  the  government. 

Furthermore,  the  stamp  tax,  imposed  for  a  limited  period,  was 
extended  until  the  year  1920.  Freight  and  passenger  rates  were 
further  raised  by  lO  to  16  per  cent  on  all  commodities  except  coal. 
The  coal-production  tax,  a  very  lucrative  source  of  revenue,  sub- 
jected all  coal,  domestic  or  imported,  to  a  tax  of  20  per  cent  ad 
valorem,  except  that  coal  used  in  homes  was  taxed  only  10  per 
cent. 


GERMAN  PUBLIC  FINANCE  149 

(d)  Non-Federal  Taxes — 

From  the  beginning  of  the  war,  the  States  and  munidpalitica 
had  to  bear  a  share  of  the  war  burden.  As  a  result,  the  states  in- 
creased their  income-tax  rates.  Few  new  taxes  were  laid.  By 
statute,  the  increase  of  taxation  by  the  federal  states  applied  auto- 
matically to  many  municipal  taxes  and  therefore  the  municipalities 
did  not  have  to  exercise  independent  powers  of  taxation  to  any 
great  extent. 

D.  The  Budget^' 

i.  Total  Requirements 

For  19 1 8,  the  budget  requirements  were  mk.  7300  million,  and 

for  1919,  mk.  17,500  million. ^*^ 

The  expenditures  for  19 19  were  as  follows: 


Items 

Billion  marks 

Service  of  the  debt 

lO.O 

Pensions     

4-3 

I.  7 

Administration 

Other  expenses 

IS 

Total 

17-5 

The  estimated  deficit  was  mk.  10  million.  In  addition  to  the 
federal  budget,  the  several  states  had  expenditures  of  mk.  6  million. 

The  1920  budget  called  for  revenues  and  expenditures  three 
times  as  great  as  in  1919.  The  expenditures  of  the  Empire  were 
mk.  55,600  million  and  the  revenue  mk.  29,000  million.  The 
expenditures  included  ordinary  expenditures  of  mk.  28,000  million 
and  extraordinary  expenditures  of  mk.  11,600  million.  In  addition 
the  deficit  in  the  postal  and  railway  service  was  over  mk.  idfiOO 
million. 

"  Statistisches  Jahrbuch,  sec.  xv,  Finanzwesen,  gives  a  five-year  record 
of  the  budget.     The  Reichshaushalts-etat  gives  the  details  of  the  budget. 

"*  Budget  address  of  Dr.  Schiffer,  Minister  of  Finance.  Weimar,  April 
9.    1919- 

Estimate  submitted  by  Finance  Minister  Erzberger,  Commerce  R«p«rt«, 
November   12,  1919. 


15©       INTERNATIONAL   FINANCE   AND    IIS   REORGANIZATION 
BtTDGET  FOR   1920 


Items 

Billion  marks 

Expenses: 

Commonwealth  debts 

12.4 

3-9 
I .  I 

Pensions,  allowances  to  disabled  and  to  widows 

Medical  treatment  of  wounded  soldiers 

Other  expenses  on  soldiers 

30 
■^  .0 

Food  subsidy 

Military  and  Navy  budget 

1 .0 

For  miscellaneous  purposes 

2. 7 

Total 

28.0 

Extraordinary  Budget: 

Payments  under  the  Peace  Treaty 

•^.o 

Demobilization  of  the  army  and  navy 

2 . 1 

Expenses  of  prisoners  of  war 

1 .0 

Riot  damage 

1 .0 

Sundry .      .            

2 .  ^ 

Deficits  of  postal  service  and  railways 

16 .0 

Total 

27.6 

Grand  total  budget 

';';.6 

Estimated  Revenues  of  the  Regular  Budget: 

Revenues  from  administration           

0. 2 

Direct  taxation  and  taxes  on  trafi&c 

10.8 

Duties  and  consumption  tax 

9. 1 

Other  direct  taxes      

3.0 

Revenues  from  banks  and  from  export  duties 

2.0 

Revenues  anticipated  from  new  taxes 

2.9 

Total 

29.0 

The  budget  was  subsequently  revised  to  yield  mk.  39,890 
million.  The  revenue  was  derived  chiefly  from  the  income  tax,  the 
coal  tax,  the  sales  tax,  and  customs  revenue. 

The  final  figures  for  the  year  1920  indicated  a  revenue  of  mk. 
27,720  million,  expenditures  of  mk.  102,576  million,  and  a  deficit 
of  mk.  74,855  million,  met  by  an  increase  in  the  floating  debt. 


li.  Deficits. 

The  deficit  of  the  191 9  budget  increased  as  the  year  advanced 
and  exceeded  the  estimates.     The  1920  deficit  amounted  to  mk. 


GERMAN   PUBLIC   FINANCE 


151 


26,600  million  in  the  early  budget  proposals.  On  September  23, 
1920,  Herr  Wirth  estimated  the  1920  deficit  at  mk.  55,700  million, 
and  at  the  end  of  the  year  the  deficit  seemed  to  be  mk.  74,855 
million. 

Ordinary  Budget  Revenue  for  1920,  Revised 


Items 

Direct  Taxes: 

Income  tax 

Corporation  tax 

Tax  on  interest  and  dividends 

Property  tax 

Inheritance  tax 

Total  direct  taxes 

Indirect  Taxes  and  Monopolies: 

Sales  tax 

Coal  tax 

Customs  revenue 

Land  tax 

Stamp  tax 

Railway  tax 

Tobacco  tax 

Beer  tax 

Wine  tax 

Champagne  tax 

Brandy  tax 

Mineral  waters  tax 

Matches  tax 

Cards  tax 

Profits  of  loan  bureaus 

Profits  of  the  Reichsbank .... 
Miscellaneous  revenue 

Total  indirect  ta.xes .  . . 

Emergency  levy 

Property  increment  tax 

Total  special  taxes .... 

Grand  total 


Million  marks 


12,000 

900 

1,300 

ICO 

620 


3.650 

4,000 

2,500 

220 

400 

630 

1,000 

130 

250 

100 

320 

500 

500 

120 

1,850 

350 

2,420 


2,500 
4,500 


14,920 


17,970 


7,000 
39,890 


The  extraordinary  budget  consisted  of  the  expenditures  inci- 
dental to  the  execution  of  the  terms  of  the  Treaty  of  Peace  and 
were  larger  than  estimated.  The  actual  expenditures  for  the  year 
1919  and  up  to  July  26,  1920,  and  estimated  expenditures  for  the 


252        INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 

two-thirds  of  the  year  ending  March,  1921,  totaled  mk.  53,685 
million,  apportioned  as  follows: 


Million  marks 


Anny  of  occupation,  reparation  commission,  etc 

Disarmament 

Restitution 

Payment  and  deliveries  under  the  treaty 

Damages  owing  to  liquidation  of  property  and  compensation 

Total 


14,900 

5, 200 

565 

25,540 
7,480 


53,685 


The  origin  of  the  deficit  is  the  same  as  in  the  other  countries 
of  Europe.  The  issue  of  paper  money  raised  all  prices,  including 
the  cost  of  administering  the  government.  The  continuous  issue 
of  paper  money  increased  prices  and  widened  the  gap  between 
revenue  and  expenditure.  Then  to  bridge  it,  the  government  issued 
more  paper  money. 

To  keep  the  price  of  necessities  down,  the  Imperial  government 
granted  a  food  subsidy  of  mk.  3000  million  for  the  year.  Further- 
more, in  spite  of  an  increase  of  400  per  cent  in  postal  rates,  the 
postoffice  department  showed  a  deficit  of  mk.  2000  million.  The 
railroad  deficit  amounted  to  over  mk.  16,000  million.  Before  the 
war  the  income  from  railroad^  made  it  possible  to  reduce  the 
national  debt.  In  191 3  the  surplus  of  the  railroads  was  about  mk. 
325  million,  but  it  decreased  during  the  war  and  in  191 7  amounted 
to  only  mk.  18  million.  In  1918  a  deficit  of  mk.  1325  million 
appeared.  The  Prussian  railroads  before  the  war  were  appraised 
at  about  mk.  7,000  million. 

In  criticism  of  the  amount  of  the  budget  deficit,  mk.  76,000 
million,  the  French  experts  on  the  Reparations  Commission  pointed 
out  that  whereas  the  budget  estimate  of  expenses  necessary  to 
execute  the  Peace  Treaty  was  mk.  42,000  million,  the  amount 
actually  expended  was  only  mk.  17,000  million.  The  railroad 
deficit  was  due  in  part  to  the  fact  that  the  personnel  was  increased 
by  over  350,000  employees  since  the  pre-war  days,  and  the  em- 
ployees in  the  postal  service  were  several  times  as  numerous  as  in 
19 1 9.  The  expenses  of  the  several  ministries  increased  greatly  over 
the  191 9  figure.  For  instance,  budget  estimates  for  the  Ministry 
of  the  Interior  in  1920  were  mk.  1,433  million  as  against  mk. 


GERMAN   PUBLIC   FINANCE 


153 


19  million   in   1919.     The  figures  for  the   Ministry  of  Foreign 
Affairs  were  mk.  295  million  in  1920  and  mk.  24  million  in  1919. 

iii.  Budget  Comparisons 

The  pre-war  budget  of  Germany  amounted  to  about  mk.  3500 
million,  the  1920  budget  amounted  to  mk.  55,500  million,  or  over 
fifteen  times  as  much.  The  service  of  the  debt  in  1913  amounted 
to  mk.  238  million,  and  in  1920  to  mk.  12,400  million,  an  increase 
of  52-fold.  The  debt  service  in  191 3  constituted  6.4  per  cent  of 
the  total  budget  and  in  1920  it  was  22.4  per  cent.  The  interest 
on  the  debt  in  1920  was  3.4  times  the  total  expenditures  of  the 
19 1 3  budget. 


Pre-War  Budget,  Fiscal  Year  Ending  March  31,  1914 


Items 

Expenditures  for: 

Imperial  debt 

Army 

Navy 

Post  and  telegraph 

Railways 

Pension  fund 

Treasury 

Miscellaneous 

Extraordinary 

Total 

Revenue  from: 

Treasury 

Post  and  telegraph 

Railways 

Miscellaneous 

Extraordinary 

Total 


Million  marks 


237.8 
775-9 
1974 
699 -3 
108.7 

142.5 

II4-3 

1301-5 

118. 6 


3696.0 


2489.0 

842.4 

153-8 

92.2 

118. 6 


3696.0 


The  pre-war  income  of  Germany  was  about  mk.  45,000  million, 
a  sum  less  than  the  present  annual  budget.  Indeed,  inflation  de- 
stroyed the  significance  of  this  comparison.  It  changed  the  mone- 
tary unit  in  which  the  comparison  is  expressed.  Inflation  lightened 
the  burden  of  the  war  and  deflation  will  increase  it,  if  the  debt  is 
paid. 


154 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


That  the  raising  of  the  German  national  revenue  already  bears 
heavily  upon  the  individual  taxpayer  is  evident  from  an  estimate 
prepared  by  Mr.  Dumont,  Chairman  of  the  French  Budget  Com- 
mittee, who  calculated  the  per  capita  tax  of  the  several  belligerents, 
vi^hich  is  given  in  dollars  at  parity  as  follows:  In  Germany  $175, 
in  England  $105,  in  France  $91,  in  America  $50,  in  Italy  $45/' 

The  figures  submitted  by  Austen  Chamberlain  in  the  House 
of  Commons  likewise  indicates  the  burden  on  the  German  taxpayer. 
However,  since  the  conversion  into  sterling  is  at  mint  parity,  allow- 
ance must  be  made  for  the  varying  degrees  of  inflation  of  the 
currency. 

Direct  Taxes  per  Capita 


Country 

1913 
s.         d. 

1920 
s.         d. 

Ratio  of  1920  to 

1913  taxes. 

Per  cent 

Italy 

12  6 

13  6 

31  0 

32  10 

43     3 

47     0 

303     0 

452     7 

346 

348 

977 

1379 

France 

England 

Germany 

A  more  accurate  measure  of  the  burden  of  taxation  is  the  per- 
centage of  income  paid  in  taxes.  In  England,  the  lower  classes  pay 
in  both  direct  and  indirect  taxes  between  7  and  8  per  cent  of 
annual  earnings,  whereas  in  Germany,  the  same  class  would  pay 
about  16  per  cent.  The  relative  rates  of  taxation  in  the  higher 
income  classes  is  likewise  greater  in  Germany. 


Relative  Income  Tax  Rates 
(conversions  at  parity) 


Amount 

Paid  in  Germany 

Paid  in 

England 

of 
income. 
Marks 

On  earned 
income. 
Per  cent 

On  unearned 
income. 
Per  cent 

On  earned 
income. 
Per  cent 

On  unearned 
income. 
Per  cent 

50,000 
100,000 
300,000 

26. 1 
33-6 
45-7 

32. 5 
39- 1 
50.2 

75 
iS-7 
23.2 

9.0 

18.7 
239 

"Frankfurter  Zeitung,  Ma}-  14,  1920. 

*  Frankfurter  Zeitung,  September  22,  1920. 


GERMAN   PUBLIC   FINANCE  ISS 

E.  An  Appraisal  of  German  War  Finance 

Before  the  war  the  debt  of  the  states  and  provinces  grew  as  a 
result  of  social  legislation.  The  debt  of  the  Empire  alone,  excluding 
that  of  its  political  subdivision,  was  about  one-sixth  that  of  France, 
about  one-third  that  of  Great  Britain,  and  slightly  less  than  the 
national  debt  of  the  United  States. 

i.  The  Debt 

The  German  fiscal  policy  during  the  war  was  based  on  a  wrong 
theory, — that  the  indemnity  levied  upon  the  enemy  would  refund 
the  war  debt.  But  unethical  as  the  aim  was,  German  war  finance 
was  well  organized.  The  loans  were  issued  at  definite  intervals. 
The  rate  of  interest  was  constant  and  the  yield  fairly  so.  The 
securities  were  of  a  uniform  type ;  there  was  no  need  for  diversifica- 
tion of  types  of  war  loans  as  in  France  particularly  and  even  in 
Great  Britain,  in  order  to  attract  subscriptions.  The  loans  were  re- 
deemable in  about  lO  years.  This  feature  showed  financial  foresight. 
Until  the  collapse  of  Germany,  the  floating  debt  constituted  a  small 
percentage  of  the  total  debt,  in  striking  distinction  to  that  of  France 
and  even  of  Great  Britain.  At  the  end  of  191 8,  when  the  total  debt 
was  mk.  139,000  million,  the  floating  debt  was  mk.  40,000  million. 
The  failure  of  German  credit  after  the  armistice  raised  the  floating 
debt  to  mk.  92,000  million  out  of  a  total  debt  of  mk.  197,000  mil- 
lion. With  the  exception  of  a  small  loan  in  the  United  States, 
soon  repaid,  and  loans  in  the  neighboring  neutral  countries,  the 
foreign  debt  of  Germany  was  practically  nil.  The  German 
students  of  finance  pointed  out  that  internal  loans  had  an  ad- 
vantage over  external  loans  in  that  the  proceeds  were  spent  at 
home,  that  there  was  no  burden  through  the  payment  of  interest 
to  foreigners,  and  the  entire  national  production  and  savings  were 
devoted  to  the  war.^^ 

However  the  Germans  made  a  virtue  of  a  necessity.  External 
credits  have  no  value  if  foreign  supplies  cannot  be  imported  from 
the  lending  country.  The  blockade  made  external  loans  useless  to 
Germany. 

Strong  inducements  practically  compelled  subscriptions.  For 
instance  a  portion  of  the  salaries  of  all  public  officials  was  retained 

^'Bonn,  M.  J.,  German  War  Finance,  Chaps.  II,  III. 


156        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

for  the  purchase  of  war  scrip.  Soldiers  were  offered  ten  days'  leave 
for  every  mk.  500  they  subscribed.  Treasury  bills,  the  proceeds  of 
which  were  to  be  devoted  to  the  loan,  bore  a  preferential  rate  of 
discount,  as  did  also  bank  deposits  ear-marked  for  the  loan.  Savings 
banks  waived  the  usual  notice  of  withdrawal  in  favor  of  subscribers 
to  war  loans.  Loan  banks  offered  loans  at  low  rates  of  interest,  to 
borrowers  subscribing  to  war  bonds.  Municipalities  offered  to 
investors  in  their  securities  an  exchange  of  holdings  for  national 
war  bonds.^^  Attractive  features  were  added  to  the  later  loans. 
The  sixth  loan  was  made  redeemable  at  a  premium  by  lot.  Bonds 
drawn  would  be  paid  at  no,  and  undrawn  bonds  converted  into 
bonds  bearing  lower  interest  would  be  redeemable  at  further  draw- 
ings at  115  or  120. 

War  loans  were  raised  by  dangerous  financial  methods.  Official 
instructions  to  subscribers  to  the  third  war  loan  reveal  the  pyramid- 
ing of  German  credit.  "If  you  have  already  subscribed  to  the  first 
and  second  war  loans  and  paid  in  full  for  the  same  you  can  par- 
ticipate in  the  present  issue.  All  you  need  to  do  is  to  take  your 
stock  or  the  receipt  for  the  amount  paid,  to  a  bank  which  will 
advance  you  75  per  cent  of  the  nominal  value,  so  that,  if  you  have 
mk.  400  of  old  war  loan  you  can  subscribe  mk.  300  in  the  new  issue 
without  paying  a  single  pfennig.  You  can  even  subscribe  four  times 
this  amount,  or  mk.  1,200,  if  you  also  leave  with  the  bank  the  stock 
that  you  take  in  the  new  loan  in  which  case  you  will  have  given 
the  bank  as  security  400  mk.  of  the  old  war  loan  and  mk.  1200 
of  the  new  war  loan,  together  mk.  1,600,  against  a  loan  of  mk. 
1,200."^^  Similar  methods  were  adopted  for  attracting  subscrip- 
tions from  neighboring  neutral  countries.  In  Denmark,  for  example, 
German  bonds  of  m.k.  1,000  were  offered  in  exchange  for  Danish 
gold,  and  by  depositing  these  bonds  at  the  bank  and  paying  mk. 
500  additional,  the  purchaser  received  a  second  bond  valued  at  mk. 
1,000.  By  depositing  the  second  bond  and  paying  another  mk. 
500  he  received  a  third  bond  for  mk.  1,000.  He  thus  became  the 
holder  of  three  German  bonds  of  an  aggregate  principal  value  of 
mk.  3,000  which  cost  him  mk.  2,000.^* 

The  evils  of  the  excessive   reliance   upon  loans  to  finance  the 

**  Jennings,  H.  J.,  Germany's  Financial  Outlook.  Nineteentn  Century, 
Februarj',  1918,  375-6. 

"Koelnische  Zeitung,  September  2,  1915,  quoted  in  New  York  Nation, 
March  8,  1917. 

**  Nineteenth  Century,  id.,  p.  378. 


GERMAN   PUBLIC  FINANCE  157 

war  manifested  themselves  in  increasing  debt  charges,  and  in  the 
rising  cost  of  administering  the  government  and  in  the  rise  of  the 
cost  of  living.  When  the  budget  was  no  longer  adequate  to  pay 
the  service  of  the  debt,  vigorous  taxes  became  necessary,  and  to 
apply  them  suddenly  was  a  difficult  matter. 

The  German  loan  policy  broke  down  as  a  result  of  the  pro- 
longation of  the  war.  It  was  carefully  conceived  to  meet  the  needs 
of  a  short  war.  But  it  produced  all  the  results  of  inflation  and  was 
condemned  finally  by  German  officials  and  by  students  of  finance. 
In  the  words  of  Dr.  Bernhard  Dernburg  "The  financing  of  the  war 
has  really  not  been  effective.  .  .  .  We  are  able  to  balance  the 
budget  by  leaving  the  whole  of  our  military  expenditures  out  of 
the  ordinary  estimates  and  by  entering  it  as  an  extraordinary  war 
expenditure.  We  have  a  new  debt  to  the  amount  of  mk.  ioo,000 
million  and  for  the  service  of  this  debt  we  need  about  mk.  7,0(X) 
million.     But  in  this  direction  practically  nothing  has  been  done." 

ii.   Taxation 

The  original  theory  advanced  by  the  Ministry  of  Finance  was 
that  war  taxation  would  not  be  levied.  However,  the  need  for 
balancing  the  budget  compelled  a  change  of  policy.  Taxation  was 
to  be  levied,  but  only  to  meet  the  interest  charges  on  the  war  debt. 
There  was  delay  not  only  in  passing  tax  legislation  but  also  in 
putting  it  into  effect,  notably  in  the  case  of  the  war  profits  tax. 
The  limitations  of  the  old  German  constitution  made  an  elastic 
system  of  imperial  taxation  impossible.  Toward  the  end  of  the 
war  a  vigorous  taxation  policy  was  introduced,  but  it  was  too  late 
to  avert  the  effects  of  the  earlier  loan  policy.  During  the  five  years 
i9i4to  1919  even  the  interest  charges  on  the  debt  were  not  com- 
pletely covered  by  revenue.  In  other  words,  the  interest  on  the 
mounting  debt  was  paid  in  part  from  loans. 

F.  Taxation  After  the  Armistice  ^^ 

The  characteristic  of  the  post-armistice  tax  policy  has  been  the 
emphasis  on  direct  taxation.  As  a  result  of  the  republican  constitu- 
tion the  tax  policy  of  Germany  was  changed  and  the  Empire  was 

°" Berliner  Tageblatt  of  April  28,  1920,  gives  the  official  text  of  these 
laws. 


158        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

endowed  with  the  right  to  levy  direct  taxes.    The  relevant  articles 
of  the  constitution  are  given  herewith: 

Article  8.  The  government  further  possesses  legislative  power  over 
taxes  and  other  sources  of  income,  insofar  as  they  may  be  claimed  in 
whole  or  in  part  for  its  purposes.  In  the  event  that  the  government  claims 
taxes  or  other  forms  of  income  which  formerly  belonged  to  its  confederated 
states,  it  will  be  bound  to  consider  the  maintenance  of  such  states'  vital 
means  of  support. 

*      *      *      * 

Article  15.  The  government  administration  exercises  supervision  in 
matters  over  which  the  nation  has  the  right  of  legislation. 

Insofar  as  the  laws  of  the  government  are  to  be  exercised  by  state 
officials,  the  government  administration  may  issue  general  directions.  It 
has  the  power  to  send  commissioners  to  the  central  authorities  of  the  state, 
and  with  their  approval  to  subordinate  officials  to  supervise  the  fulfilment 
of  the  government  laws. 

Article  84.     The  government  shall  provide  by  law  for: 
I.     The   organization  of  the   administration  of  taxes   in  the   different 
states  so  far  as  shall  be  required  for  the  unified  and  regular  fulfilment  of 
the  national  tax  laws.    ...    3.     Adjustment  accounts  with  the  confeder- 
ated states   (are  provided  for). 

The  unification  of  state  and  imperial  taxation  was  effected  by 
the  Reichsabgabcordnung  or  national  levy  ordinance.  It  stipulates 
the  proportion  of  the  proceeds  of  the  various  imperial  taxes  which 
the  federal  states  and  the  communities  are  to  receive.  In  future 
only  the  Republic  will  collect  taxes  on  income,  on  property  and  on 
inheritances.  The  former  income  tax  of  the  federal  states  had  a 
fLxed  rate  but  the  new  imperial  income  tax  has  a  graduated  rate.^* 
The  federal  states  will  receive  a  share  of  the  income  tax  on  the 
principle  that  revenue  from  the  low  rates  would  have  been  paid 
mostly  to  them  and  revenue  from  the  supertaxes  to  the  Republic. 
They  will  receive  90  per  cent  of  the  taxes  on  incomes  under  mk. 
15,000,  and  so  on  in  decreasing  ratios  until  20  per  cent  of  the  taxes 
on  incomes  over  mk.  400,000. 

The  new  law  provides  that  each  state  or  municipality  shall 
receive  from  the  revenues  of  the  national  income  tax  an  amount 
equal  to  the  average  annual  revenues  from  the  local  income  taxes 
during  the  previous  three  years.  The  administration  of  the  tax 
system  was  centralized  and  put  in  charge  of  officials  of  the  Empire. 
The  Minister  of  Finance  will  administer  all  taxes.  Cooperation 
of  state  and  local  tax  officials  is  provided  for.     Furthermore,  the 

^'Berlin  correspondence,  London  Economist,  Dec.  6,  19x9. 


GERMAN  PUBLIC  FINANCE 


159 


Empire  will  assume  the   burden  of  certain  expenditures  which 
though  local  in  form  are  national  in  character. 


i.  Indirect  Taxes 

The  sales-tax  rate  was  raised  in  19 19.  Practically  everything, 
except  the  most  essential  goods,  was  taxed  from  i  per  cent  up  to 
15  per  cent,  depending  on  its  character.  Of  19  groups  of  luxuries 
II  were  subject  to  a  15  per  cent  tax.  Sales  for  export  were 
exempted  from  the  tax.  Two  methods  of  collection  were  followed, 
in  some  cases  a  tax  on  the  sales  price  of  the  article  and  in  some  cases 
a  tax  on  the  total  turnover  of  a  retail  merchant. 

In  February,  1920,  for  the  first  time  since  August,  1914,  the 
Ministry  of  Finance  published  an  official  summary  of  the  national 
revenue.  The  Deutsche  Allgemeine  Zeitung  of  July  9,  1920, 
comments  that  "the  possibilities  of  following  up  the  development 
of  economic  conditions  in  Germany  and  of  forming  a  correct  judg- 
ment were  hampered  by  the  lack  of  sufficient  and  accurate  data. 
One  had  to  rely  on  figures  that,  now  and  then,  slipped  into  the 
public  press."  The  total  revenues  for  eight  months  ending  Janu- 
ary 31,  1920,  amounted  to  mk.  6,025  million.  The  estimated 
amounted  for  the  year  ending  March  31,  1920,  was  mk.  13,542 
million.    The  sources  of  revenue  were  as  follows: 


Extra  war  tax 

Per  cent 

16.8 

16.6 

10.8 

9.8 

9.8 

9.6 

7-7 

5-2 

13-7 

Coal  tax        

Duties 

Turnover  tax 

Tobacco  tax 

Stamp  dues  (on  legal  papers) 

Railroad  revenues 

Wine  tax 

Numerous  other  taxes 

Total 

100. 0 

The  heavy  taxes  on  income  and  property  were  passed  in  the  spring 
of  1920  and  do  not  show  in  the  above  list. 

The  receipts  for  the  fiscal  year  19 19  were  obtained  from  a  great 
variety  of  sources,  from  customs  duties,  from  taxes  on  tobacco  and 
cigarettes,  on  sugar,  on  salt,  on  the  manufacture,  import  and  con- 
sumption of  alcohol  and  its  products,  on  the  consumption  of  vinegar, 


l6o        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

wine,  champagne,  mineral  water,  and  beer,  on  illuminants,  on 
matches;  from  stamp  taxes  on  playing  cards,  on  invoices  and  bills; 
stamp  taxes  on  contracts,  securities,  dividend  warrants,  lottery 
tickets,  private  or  governmental,  bills  of  lading,  directors'  fees,  sales 
of  merchandise,  transfers  of  real  estate,  insurance;  from  taxes  on 
coal,  on  the  purchase  of  real  estate,  on  sales,  on  postal  and  tele- 
graph service;  from  the  property  tax,  inheritance  tax,  war  surtax 
to  1 91 6,  extra  W'ar  tax  of  19 18,  war  tax  of  1919,  commonwealth 
emergency  sacrifice  tax  (Reichsnotopfer),  and  tax  on  increase  of 
property. 

ii.  Direct  Taxes  on  Income  and  Profits 

{a.)Taxes  on  Income — 

The  income  tax  became  effective  April  14,  1920,  and  applies 
to  the  income  of  individuals.  The  tax  is  payable  to  the  Empire 
only.  All  Germans  are  subject  to  this  as  well  as  foreigners  deriv- 
ing an  income  from  property  or  business  in  Germany  and  aliens 
domiciled  in  Germany  longer  than  six  months.  Taxes  are  levied 
on  income  from  business  capital,  labor,  and  any  other  receipts 
including  non-recurrent  profits.  Exemptions  of  mk.  1,500  are 
granted  to  each  tax-payer  and  mk.  500  for  each  dependent  person 
in  his  household.  Inheritances,  insurance  payments,  business 
expenses,  interest  on  debt,  charitable  contributions  and  business 
losses  are  deductible.  From  10  per  cent  on  the  first  mk.  1,000 
of  taxable  income,  the  rate  rises  by  increases  of  I  per  cent  on  each 
mk.  1,000  up  to  mk.  25,000  and  ultimately  by  graduations  of  I 
per  cent  on  each  additional  mk.  50,000.  The  actual  rate  on  the 
entire  income  is  as  follows  for  a  few  selected  classes  of  income: 


Tax  on  unmarried 

Tax  on  married  with  5  children 

Income 

Marks 

Marks 

Rate  per  cent 

Marks 

Rate  per  cent 

2,000 

50 

2.5 

0 

4,000 

270 

6 

7 

0 

6,000 

530 

8 

8 

SO 

0.8 

10,000 

1,170 

II 

7 

675 

6.7 

50,000 

13,060 

26 

I 

10,980 

22.0 

100,000 

33.625 

33 

6 

32,275 

32.3 

500,000 

252,115 

50 

4 

250,345 

SO.  I 

1,000,000 

552,100 

55 

2 

550,300 

SS-o 

GERMAN   PUBLIC   FINANCE  l6l 

The  effect  of  inflation  was  to  increase  many  incomes  lo  to 
15  fold  and  thus  to  raise  the  rate  of  taxation.  A  man  with  a  pre- 
war income  of  m.k.  2,000  had  to  pay  mk.  50  or  2.5  per  cent,  but 
out  of  his  post-war  income  of  20,000  marks  he  had  to  pay  mk. 
2,000  or  10  per  cent. 

(b)  Tax  on  Income  from  Investments — 

This  tax  applies  to  income  from  accumulated  capital,  or,  as 
the  British  term  it,  unearned  income.  The  law  went  into  effect 
on  March  31,  1920.  The  tax  applies  to  the  income  from  invested 
capital  such  as  dividends,  interest,  royalties,  profits  from  every 
kind  of  participation  in  business,  claims  and  mortgages.  Germans, 
non-Germans  domiciled  in  Germany,  and  domestic  corporations  are 
required  to  pay  this  tax  on  the  income  from  their  foreign  invest- 
ments. The  exemptions  from  this  tax  include  the  income  of  sav- 
ings banks,  cooperative  societies,  insurance  companies,  universities, 
and  religious  and  charitable  institutions.  This  tax  does  not  apply 
to  the  premium  war  loan  and  other  loans  enjoying  tax-exemption. 
The  tax  rate  is  10  per  cent  and  is  paid  at  the  source,  i.  e.,  the 
debtor  pays  the  tax  within  one  month  from  the  amount  due  to 
a  creditor  liable  to  the  tax.  To  prevent  evasion,  a  law  was  passed 
permitting  banks  to  accept  dividend  warrants  only  if  the  entire 
bond  or  certificate  is  deposited  with  them. 

(c)  Tax  on  JVar-time  Increase  of  Income — 

This  tax,  also  known  as  the  extraordinary  war  tax,  went  into 
effect  on  September  10,  1919,  and  applies  to  the  excess  of  income 
in  the  fifth  year  of  the  war  over  the  pre-war  income.  Individuals 
and  corporations  are  liable  to  this  tax.  The  amount  taxable  is 
the  difference  between  the  income  for  1 91 9  and  the  income  for 
1914,  which  as  a  minimum  must  have  been  mk.  10,000  or  over. 
Corporations  are  taxed  on  the  difference  between  the  profits  of  the 
two  years.  War  incomes  of  less  than  mk.  30,000  or  income 
increases  of  less  than  mk.  3000  are  exempt,  as  are  also  increases 
of  corporation  profits  of  less  than  mk.  5000.  The  rates  of  taxation 
applicable  to  individuals  range  from  5  per  cent  on  the  first  mk. 
10,000  of  increase  up  to  70  per  cent  on  increases  of  over  mk. 
200,000.  Increases  of  corporate  profits  are  subject  to  an  80  per 
cent  tax.  The  law  recognizes  the  severity  of  this  tax  and  makes 
adeguate  provisions  for  the  modification  of  the  assessments,  for  the 


1 62        INTERNATIONAL    PINANCE    AND    ITS    REORGANIZATION 

limitation  of  this  tax  in  case  90  per  cent  of  the  total  increase  in 
income  is  taken  by  a  group  of  specified  taxes,  including  this.  If 
necessary  the  tax-payer  will  receive  credit  on  a  5  per  cent  basis 
to  pay  this  tax.  According  to  a  previous  law  efifective  July  26, 
191 8,  corporations  had  to  pay  a  tax  on  the  increases  of  profit  made 
in  191 8  at  the  rate  of  60  per  cent  of  the  increase.-^ 

(d)    Tax  on  Corporate  Profits — 

This  tax,  applicable  to  the  income  ot  corporations,  corresponds 
to  the  income  tax  on  individuals.  The  tax,  effective  April  15,  1920, 
is  levied  on  the  entire  profits,  and  consists  of  a  normal  tax  at  the 
rate  of  10  per  cent  of  the  income  and  a  surtax  which  varies  from 
2  per  cent  on  the  amount  of  the  dividends  w^hen  4  per  cent  dividends 
are  paid  up  to  10  per  cent  when  dividends  of  over  18  per  cent  are 
paid.  Corporations  exempted  include  political  bodies,  states  and 
municipalities,  universities,  charitable  and  other  like  institutions, 
and  pension  banks. 


iii.  Property    Taxes 

In  addition  to  the  several  taxes  on  income,  on  war-time  increases 
of  income,  and  on  corporate  profits,  a  series  of  property  taxes  was 
levied.  The  law  of  July  26,  1918,  taxed  property  on  the  valua- 
tion of  December  31,  19 16,  exempting  the  first  mk.  100,000.  The 
rate  varied  from  I  per  mille  on  the  first  mk.  200,000  of  taxable 
property  up  to  5  per  mille  on  property  in  excess  of  mk.  2  million. 
The  war-wealth  levy  and  the  capital  \t\y  are  treated  elsewhere. 

(a)  Recurrent  Levy  on  Increases  of  JVealth — 

In  addition  to  the  non-recurrent  levy  on  the  increases  of  wealth 
during  the  war,  the  Reichstag  passed  a  bill  (April  21,  1920)  pro- 
viding for  recurrent  taxation  on  the  increases  of  wealth  at  intervals 
of  three  years.  Increases  of  less  than  mk.  5000  and  properties  of 
less  than  mk.  20,000  were  exempted.  The  rates  vary  from  i  per 
cent  on  the  first  mk.  10,000  of  the  taxable  increment  to  lO  per 
cent  on  the  taxable  increment  above  mk.  300,000. 

Under  the  tax  an  increase  of  mk.  6000  will  pay  mk.  10, •  an 

"Koelnischc  Zeitung,  September  29,  1918. 


GERMAN   PUBLIC   FINANCE  1 63 

increase  of  mk.   10,000  will  pay  mk.  50;  of  mk.   100,000,  mk. 
2800;  and  of  mk,  I  million,  mk.  82,000.^* 

This  law  replaced  Herr  Erzberger's  proposed,  but  abandoned 
tax  on  expenditures  under  which  the  government  would  tax 
not  income  or  production  but  consumption,  or  all  personal  expendi- 
tures above  a  given  figure. 

(b)  Inheritance  Tax — 

This  tax  in  effect  September  i,  1919,  taxes  legacies  and  dona- 
tions to  natural  persons.  Germans  and  foreigners  living  in  Ger- 
many are  subject  to  the  tax.  The  law  exempts  household  goods  up 
to  mk.  50,000  and  also  mk.  2O,00o  of  an  estate  of  less  than  mk. 
200,000.  Furthermore,  legacies  of  less  than  mk.  500  are  exempt 
and  in  cases  of  bodily  injury  of  the  legatee  or  other  good  cause 
the  whole  legacy  is  exempt.  Deductions  are  allowed  of  the  debts 
of  the  testator  as  well  as  unpaid  taxes.  The  rate  of  taxation  varies 
according  to  the  amount  of  the  legacy  and  the  grade  of  relation- 
ship between  the  testator  and  the  legatee,  which  is  classified.  Six 
degrees  are  recognized.  On  the  first  taxable  mk.  20,000  willed, 
the  tax  varies  from  4  per  cent  to  15  per  cent  depending  on  the 
degree  of  relationship.  Above  mk.  150,000  of  inheritance  the  tax 
varies  from  8  per  cent  to  30  per  cent. 

iv.   The  Effect  of  Heavy   Taxation 

Taxes  in  Germany,  as  shown  above,  are  heavier  than  in  any  of 
the  major  belligerent  countries.  What  a  burden  it  is  upon  the 
individual  may  be  seen  from  typical  cases.  After  the  war  a  tax- 
payer retaining  his  pre-war  capital  of  mk.  1,000,000  and  an  annual 
income  of  mk.  50,000  must  pay  mk.  244,250  under  the  emergency 
levy.  His  income  is  thus  reduced  to  mk.  37,787  of  which  he  has 
to  pay  an  income  tax  of  mk.  8931  and  a  tax  on  investments  of 
mk.  3778,  leaving  a  net  income  of  mk.  25,078.  This  is  subject 
to  a  long  list  of  indirect  taxes  which  have  been  given  above. 

A  taxpayer  whose  pre-war  capital  was  mk.  2.5  million  and 
who  doubled  it  during  the  war  must  pay  mk.  2,328,030  war- 
wealth  levy  and  mk.  1,004,500  under  the  emergency  levy.  Of  the 
remaining  income,  he  must  pay  income  tax  of  mk.  26,439  and  a 

** Berlin  Correspondence  of  the  London  Economist,  March  9,  1920. 


1 64        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

tax  on  income  from  investments  of  mk.  8337.  His  net  income 
after  paying  direct  taxes  is  mk.  48,599  as  compared  with  a  pre- 
war income  of  mk.  125,000  or  an  income  before  the  direct  war 
taxes  were  enacted  of  mk.  250,000.  Indirect  taxes  would  diminish 
the  net  income  further. 

(a)  The  Flight  of  Capital— 

Prior  to  the  military  collapse  of  Germany  and  also  after  the 
signing  of  the  armistice,  rumors  were  afloat  that  the  government 
would  resort  to  repudiation.  These  rumors  upset  the  market  for 
war  bonds.  As  a  result  the  government  issued  a  proclamation  that 
it  did  not  intend  to  confiscate  bank  deposits,  or  money  or  securities 
of  any  description,  that  it  did  not  intend  to  invalidate  any  of  the 
war  loans  and  that  it  would  not  interfere  with  pensions  and  other 
legal  claims  of  soldiers,  widows  or  orphans.  It  did  unequivocally 
affirm  its  intention  of  levying  heavy  taxation  on  incomes  and 
property. 

As  a  result  of  the  heavy  taxes,  proposed  and  enacted,  German 
capital  fled  to  the  neighboring  neutral  countries.  Bonds  owned  in 
Germany  were  sold  at  a  sacrifice.  Even  German  currency  was 
converted  into  foreign  currency.  It  was  estimated  that  by  the 
middle  of  191 9  about  4  or  5  billion  marks  had  been  sent  to 
Holland.  The  Frankfurter  Zeitung  estimated  that  about  mk.  35 
billion  of  German  capital  had  "escaped"  into  Switzerland  from  the 
date  of  the  armistice  to  the  middle  of  1919.  German  capitalists 
bought  banknotes  of  foreign  countries  extensively,  apparently  for 
the  purpose  of  evading  taxation.  The  purchases  of  large  denomina- 
tions of  dollar  and  sterling  notes,  not  usual  as  a  trade  practice, 
continued  throughout  the  early  part  of  191 9.  Even  ruble  notes 
were  bought  at  rates  higher  than  prevailed  in  other  countries. 

(b)  The  Effects  of  the  Flight  of  Capital— 

The  sale  of  marks  and  the  purchase  of  foreign  currencies  caused 
a  slump  in  German  exchange  rates.  In  turn  the  price  level  in 
Germany  was  depressed  below  the  world's  level  and  goods  became 
very  cheap.  Foreign  purchasers  rushed  to  buy  goods  and  drained 
Germany  of  her  meager  supply  of  commodities.  German  writers 
called  this  bargain  sale  "Deutschlands  Ausverkauf."  (This  sub- 
ject will  be  treated  further  under  the  section  on  foreign  exchange.) 


GERMAN  PUBLIC   FINANCE  165 

(c)   Counter  Measures — 

To  overcome  the  effects  incidental  to  a  program  of  heavy  taxa- 
tion, various  measures  were  proposed  and  enacted,  such  as  the 
official  assurance  that  repudiation  would  not  be  resorted  to,  the 
proposal  to  restrict  emigration,  the  control  of  the  export  of  capital, 
the  abortive  proposal  to  issue  new  currency,  and  the  control  by 
banks  of  the  payment  of  interest  and  dividends  on  securities. 

1.  The  Restriction  of  Emigration. — Increasing  taxes  in- 
duce evasion.  The  comparatively  moderate  increase  in  taxation 
before  the  cessation  of  hostilities  made  it  necessary  to  consider  means 
to  prevent  evasion.  A  bill  in  the  Reichstag  provided  that  persons 
that  had  a  permanent  residence  in  Germany  and  desired  to  emigrate 
should  be  liable  for  the  payment  of  taxes  for  a  period  of  5  years 
after  the  conclusion  of  peace,  on  the  theory  that  those  who  enjoyed 
the  protection  of  the  German  army  should  pay  the  costs.  Those 
exempt  from  the  tax  included  persons  whose  property  did  not 
exceed  mk.  30,000,  persons  who  emigrated  in  the  interests  of 
Germany,  and  persons  involuntarily  detained  in  Germany.  Those 
liable  to  the  tax  must  leave  20  per  cent  of  the  taxable  property 
as  security  in  the  event  of  their  emigration.-^ 

2.  The  Control  of  the  Export  of  Capital. — The  flight 
was  to  be  checked.  Investments  of  money  abroad  were  prohibited 
by  a  decree  of  November  21,  191 8,  which  was  amplified  by  another 
dated  January  15,  1919,  to  the  effect  that  anyone  who  between  July 
I,  19 1 8,  and  the  date  of  the  first  decree  had  sent  any  securities 
abroad  by  any  means  other  than  a  bank  must  notify  the  Property 
Tax  Office.  The  banks  in  turn  must  similarly  notify  this  office  of 
the  transfer  of  money  or  securities  abroad  to  be  held  in  trust  by  a 
foreigner  or  to  be  credited  to  him.  The  export  of  goods  of  great 
value  or  of  works  of  art  must  be  reported  and  the  contents  of 
registered  letters  declared. 

To  prevent  the  smuggling  of  banknotes  out  of  the  country 
the  regulation  of  foreign  bills  was  made  more  stringent.  Only 
mk.  50  per  day  and  mk.  150  per  month  were  permitted  to  be  sent 
abroad  without  a  license.  Prior  to  December  18,  19 18,  the  limit 
was   1000  marks  per  day  and  mk.  3000  per  month.     An  act  of 

^Koelnische  Zeitung,  April  19,  1918;  also  British  Board  of  Trade 
Journal,  May  23,  1918;  Commerce  Reports,  June  15,  1918. 


1 66        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

March  i,  1919,  forbade,  under  penalty,  traffic  in  German  bank- 
notes. Frontier  guards  were  strengthened  to  make  the  law  effec- 
tive.'" 

3.  The  Issue  of  New  Money. — The  existing  currency  was  to 
be  demonetized.  To  prevent  the  evasion  of  taxes  the  Ministry  of 
Finance  proposed  to  withdraw  all  paper  money  and  to  replace  it  by 
bonds  or  emergency  paper.  The  latter  was  to  be  exchanged  for  new 
money,  when  issued,  and  the  old  paper  money  would  be  declared 
invalid.  To  avoid  trouble,  holders  were  advised  to  deposit  their 
money  in  banks.  Preparation  was  also  made  for  exchange  over  a 
counter.  A  list  of  holders  and  the  amounts  was  then  to  be  trans- 
mitted to  the  tax  office. 

These  measures  aroused  great  protest.  The  difficulties  of  the 
plan  were  many.  The  length  of  time  for  registration  and  stamp- 
ing of  the  billions  of  currency  outstanding  would  be  very  great. 
The  proposed  issuance  of  temporary'  currency  until  a  new  series 
could  be  prepared  would  be  a  temptation  to  wholesale  forgery. 
The  measure  was  therefore  abandoned. ^^ 

4.  Bank  Control  of  Income  from  Investments. — The  aid 
of  banks  was  enlisted.  The  fear  of  the  proposal  to  stamp  money  in- 
duced people  to  invest  in  securities.  When  the  plan  failed,  the  gov- 
ernment attempted  to  trace  the  property  and  income  of  its  citizens 
through  the  registration  of  securities.  Regulations  were  issued 
whereby  coupons  and  dividends  could  be  collected  only  through 
banks  and  bankers.  In  case  securities  were  kept  abroad  or  in  private 
vaults  the  bank  might  pay  interest  or  dividends  only  upon  statements 
under  oath  as  to  the  place  of  deposit  and  the  amount  of  the 
securities.  The  banks  were  to  furnish  this  information  to  the 
Treasury.  As  a  result  of  this  measure  securities  were  sold  again 
and  paper  money  again  hoarded,  or  sent  out  of  the  country.  So 
the  game  of  "hide  and  seek"  was  played  on  a  national  scale.  To 
prevent  the  flight  of  capital  may  require  international  cooperation 
for  currency  exports  remain  uncontrolled. ^- 

*"  Deutsche  Allgemeine  Zeitung,  March  15,  1919. 

"Deutsche  Allgemeine  Zeitung,  ibid.,  March  15,  1919;  Associated 
Press  dispatch,  Weimar,  July  23,  1919;  Journal  of  Commerce,  September 
17,  1919. 

**KoeIni9che  Zeitung,  November  22,  1919;  Algemcen  Handelsblad, 
Amsterdam,  November  2,  1919;  Commerce  Reports,  November  29,  1919. 


GERMAN   PUBLIC   FINANCE  167 

G.  The  Outlook 

But  heavy  taxation  will  not  assure  the  financial  future  of  Ger- 
many. No  perspective  is  true  which  omits  from  view  the  in- 
demnity and  the  financial  demands  of  the  victorious  powers.  The 
manner  of  settlement  of  the  indemnity  determines  the  outlook  in 
Germany. 

1.  Further   Inflation    and  Bankruptcy    Proposed 

Advocates  of  cheap  money,  and  those  who  would  cure  her 
economic  ills  by  printing  more  paper  money  are  not  lacking  in 
Germany.  Frequent  proposals  were  made  to  repudiate  the  war 
loans,  or  to  issue  non-interest  bearing  loans  which  would  circulate 
as  currency,  as  means  of  ridding  the  state  of  interest  charges  and 
of  balancing  the  budget.^^ 

In  view  of  the  increasing  deficits  in  the  budget,  and  the  large 
indemnity  that  Germany  is  to  meet,  national  bankruptcy  is  seriously 
being  advocated  as  a  solution.  Some  German  bankers  regard 
the  step  as  inevitable  in  view  of  the  loss  of  resources,  the  lack  of 
raw  material,  the  undernourishment  of  the  population  and  the 
inability  to  obtain  credit.  This  bankruptcy  may  take  the  form  of 
a  reduction  or  suspension  of  interest,  temporarily  or  indefinitely, 
the  repudiation  of  the  principal,  or  even  a  confiscatory  tax  on 
interest  from  war  loans.  The  spirit  of  the  people  is  depressed  and 
direct  taxes  cannot  be  increased.  Indirect  taxes  would  further 
lower  the  standard  of  living  or  else  compel  the  government  to 
subsidize  the  distribution  of  food,  causing  the  deficit  in  the  budget 
to  increase. 

Opposition  to  a  declaration  of  bankruptcy  is  based  on  financial, 
social,  and  ethical  considerations.  Cessation  of  interest  payments 
or  cancellation  of  state  debts  are  regarded  as  impossible  proposals. 
The  savings  banks  and  insurance  companies  have  billions  invested 
in  war  loans.  The  commercial  banks  are  holding  billions  of  short- 
term  indebtedness,  almost  50  billion  on  March  31,  1 920.  Public 
announcement  of  insolvency  would  reduce  the  taxable  income  in 
Germany  by  an  amount  greater  than  the  charges  on  the  debt. 
Furthermore,   the  expedient  would  be   "unjust,   brutal   and   anti- 

^'A  typical  example  is  a  pamphlet  by  a  Dr.  Alexis  Schleiraes,  "Must 
We  Pay  Interest  on  War  Loans?"     See  also  Plutus,  March  27,  1918. 


1 68        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

quated"  according  to  Dr.  Walther  Rathenau,  It  would  penalize 
those  citizens  who  helped  to  finance  the  war  and  would  break 
the  promises  of  the  old  as  well  as  the  new  government  of  Germany. 
Finally,  the  war  bonds  were  distributed  widely  among  the  masses 
who  have  a  stake  in  the  maintenance  of  the  existing  order.  A 
declaration  of  national  bankruptcy  would  cause  the  vanishing  of 
their  continually  depreciating  savings  and  might  be  the  removal 
of  the  last  prop  of  the  social  order.  Because  of  its  social  results 
national  bankruptcy  is  perilous.^* 

ii.  Increasing   the  National  Revenue 

The  more  hopeful  economists  expect  that  Grermany  will  solve 
her  difficulties  by  increasing  the  national  income  and  the  tax 
revenues.  The  control  of  national  expenditures  in  the  attempt  to 
balance  the  budget  was  entrusted  to  a  National  Finance  Commis- 
sioner, a  new  functionary,  with  wide  powers  to  curtail  expenditures. 
The  extent  to  which  drastic  direct  taxes  have  been  put  into  effect 
has  been  shown.  Germany  has  probably  exhausted  both  in  extent 
and  severity  the  possible  sources  of  taxation.  It  is  feared  even 
that  industry  will  be  repressed,  and  exports  checked  by  the  exist- 
ing drastic  fiscal  policy. 

Another  means  of  meeting  the  fiscal  demands  after  the  war 
is  by  increasing  the  national  income.  The  attempt  to  diminish 
the  consumption  of  the  individual  through  a  tax,  not  on  income, 
but  on  expenditures,  failed  of  enactment.  But  there  is  a  wide- 
spread determination  to  eliminate  industrial  inefficiency  and  the 
wastes  of  the  competitive  system.  As  a  result  of  the  war,  produc- 
tion per  capita  was  increased  through  the  abandonment  in  an 
industry  of  inefficient  plants  and  the  concentration  of  production 
in  those  that  were  well  located  with  respect  to  sources  of  supply, 
labor,  and  markets.  The  standardization  of  product,  the  concen- 
tration of  industries  in  a  few  strong  hands,  and  elimination  of 
competition,  with  government  encouragement  and  control,  are  being 

•*  Germany's  Solvency  for  the  Purpose  of  Reparation,  a  memorandum, 
prepared  by  Dr.  Moritz  Bonn  and  submitted  by  the  German  delegation 
at  the  Spa  Conference  in  July,  1920.  Reprinted  in  the  New  York  Nation, 
October  6,  1920,  pp.  384-390. 

Warburg,  Max  M.,  Die  notwcndigen  Vorbedingungen  fur  die 
Gesundung  der  deutschen  Wdhrung,  Hamburg:  Ackerman  and  Wolf,  1920; 
pp.  26-28. 

Weltwirtschaftszeitung,  December  13,  191S. 


GERMAN   PUBLIC   FINANCE  1 69 

introduced  in  the  industries  either  through  the  formation  of  syndi- 
cates of  private  firms  or  through  the  partial  nationalization  n^ 
industries.  Trading  in  commodities,  particularly  those  produ  "'^d 
abroad  or  entering  into  foreign  trade,  will  be  relatively  unrestricted. 
It  is  the  hope  that  the  national  income  will  be  increased  by  these 
means,  so  that  the  burden  of  the  new  budgets  may  be  diminished. ^^ 

iii.   Germany's  Losses 

The  terms  of  the  treaty  have  cut  down  Germany's  capacity 
to  pay  the  indemnity.  The  loss  of  territory  has  reduced  the  area 
of  agricultural  production  by  13.5  per  cent.  The  inability  to 
obtain  fertilizers  during  the  war,  the  decline  in  fodder  imports 
and  the  consequent  decline  in  live  stock,  resulted  in  a  decline  in 
the  production  of  vegetable  food  of  40  per  cent  and  in  animal 
food  of  60  per  cent.  Furthermore,  Germany  lost  from  70  to  75 
per  cent  of  her  iron-ore  resources  and  will  retain  only  60  per  cent 
of  her  capacity  for  producing  iron  and  steel.  The  amount  of 
steel  exports  available  for  the  payment  of  reparation  will  be  reduced 
further  by  the  need  to  pay  for  imported  ore  and  for  meeting  the 
minimum  domestic  requirements  of  industry.  The  loss  of  coal 
resources,  allowing  for  the  varying  fuel  value  of  different  grades, 
will  reduce  the  production  to  57  per  cent  of  the  pre-war  output. 
The  seizure  of  German  assets  abroad,  the  rupture  of  foreign  con- 
nections of  German  merchants  and  the  loss  of  merchant  shipping 
have  eliminated  a  large  source  of  invisible  credits  in  the  balance 
of  trade.  These  losses  have  reduced  industrial  production  to  50 
per  cent  of  its  pre-war  capacity.  To  these  difficulties  are  added 
the  chaotic  financial  condition,  the  lag  between  wages  and  rising 
prices,  and  the  psychological  depression. 

There  are  slight  offsets  to  these  losses.  Apparently  Germany 
is  politically  stable.  It  has  successfully  weathered  a  revolution 
with  notably  little  cost.  Bolshevism  will  probably  find  no  place 
among  a  population  which  is  lowest  in  illiteracy  in  Europe. 
Although,  in  common  with  labor  in  other  countries,  German  labor 
is  weary  and  discontented,  an  adequate  supply  of  food  would 
probably  restore  the  habits  of  industry  and  thrift  that  prevailed 

"Prof.  Franz  Eulenburg,  Germany's  Financial  Policy  After  the  War. 
Welthandel,  June  21,  1918. 

Walther  Rathenau,  Die  Neue  Wirtschaft,  a  book  devoted  to  the  subject. 
George  Munch,  in  the  Vossische  Zeitung,  January  20,  1918. 


170        INTERNATIONAL    FINANCE    AND    ITS    REORGAN^ZATI0N 

before  the  war.  Widespread  vocational  training  and  technical 
.jskill,  the  fruits  of  the  pre-war  period,  are  still  assets  of  the  Ger- 
Fi^^n  workers,  even  though  they  may  lack  the  raw  material  to 
which  to  apply  them. 

iv.  Prerequisites  for  Payment   of  Indemnity 

The  reparation  demands  will  call  for  34  per  cent  of  the  cur- 
rent annual  output  of  Germany's  coal  production,  and  40  per  cent 
of  the  building  capacity  of  the  German  shipyards  before  the  war. 
In  addition  to  these  annual  charges,  a  lump  sum  of  132  billion  gold 
marks  was  finally  accepted  by  Germany  as  the  indemnity.  Assum- 
ing that  an  indemnity  of  only  50  billion  gold  marks,  the  definitely 
fixed  minimum,  is  to  be  levied,  the  interest  at  5  per  cent  and 
sinking-fund  at  i  per  cent  will  require  3  billion  gold  marks  or  30 
billion  paper  marks.  Can  Germany  pay  this  sum?  In  order  of 
precedence,  reparation  payments  must  come  after  the  population 
has  had  food  and  employment,  and  after  the  deprivation  of  goods 
during  the  war  has  in  part  been  made  good.  To  provide  these 
two  needs,  prior  to  reparation,  Germany  needs  credit.  For  example, 
the  raw  material  necessary  in  the  textile  trade  requires  credit  of 
4.5  billion  gold  marks.  Before  these  additional  credits  can  be 
obtained  outstanding  credits  must  be  paid.  In  the  14  months  from 
January,  19 19,  through  February,  1920,  the  excess  of  imports 
over  exports,  plus  the  unpaid  balance  of  imports  from  neutral 
countries  during  the  war,  totaled  mk.  60  million,  of  which  about 
10  billion  have  been  paid  through  the  exportation  of  gold  and 
securities. 

Germany  can  pay  only  in  goods — by  an  excess  of  exports  over 
imports.  For  even  if  she  mortgaged  all  the  private  and  public 
property  in  Germany,  she  could  pay  interest  to  her  creditors  only 
in  commodities.  The  charges  of  interest  and  amortization  on  132 
billion  gold  marks  would  absorb  the  entire  pre-war  national  savings 
of  Germany  and  would  leave  Germany  without  any  surplus  capital 
for  the  inevitable  new  developments  that  are  the  marks  of  a 
progressive  civilization.  Heavy  taxation  will  remove  the  incentive 
to  effort  and  production.  Since  Germany  can  pay  the  indemnity 
only  by  exports,  the  Allies  must  decide  whether  they  wish  to 
restore  the  prestige  of  Germany.  They  are  by  no  means  unanimous 
in  this  decision  for  at  least  one  of  them  feels,  that  a  prosperous 


GERMAN   PUBLIC   FINANCE  lyi 

Germany  means  a  powerful  and  vengeance-seeking  enemy.  If 
Germany  is  put  in  a  position  where  she  can  have  an  excess  of 
exports,  she  may  be  able  to  pay  a  part  of  the  indemnity.  Other- 
wise the  hope  of  her  liquidating  the  indemnity  is  largely  futile. 
In  order  that  she  may  be  restored,  her  finances  must  be  put  upon 
a  sound  basis.  The  amount  of  her  liabilities  under  ^he  reparation 
clauses  will  determine  the  volume  of  the  floating  ebt  and  will 
determine  also  whether  her  budget  will  balance,  Fcr,  if  only  the 
50  billion  gold  marks  definitely  fixed  in  the  treaty  were  set  as  the 
total  indemnity,  the  per  capita  debt  would  be  about  i  thousand 
gold  marks  or  about  10  thousand  paper  marks.  The  average  head 
of  a  family  of  four  would  at  6  per  cent  have  to  pay  annually 
2400  paper  marks  for  interest  and  sinking  fund.  According  to  the 
statistics  of  Prussia  in  191 8,  81  per  cent  of  the  taxpayers  had  an 
income  of  less  than  3  thousand  marks.  And  taxpayers  are  a  minority 
of  the  population.  A  strict  execution  of  the  treaty  of  peace  would 
lead  to  national  bankruptcy  in  Germany.  The  extent  to  which 
the  German  people  will  prefer  the  evils  of  high  taxation  to  the 
evils  of  national  bankruptcy  depends  on  the  Allies. 

Germany  will  not  recover  for  a  number  of  decades  at  best. 
The  rate  of  her  recovery  will  determine  not  only  the  rate  of  repara- 
tion payments  but  also  the  rate  of  the  restoration  of  Europe  and 
even  of  the  world  at  large.  The  world  may  not  yet  be  a  political 
unit  but  it  undoubtedly  has  long  been  an  economic  unit.  Rather 
it  is  an  economic  organism,  which  cannot  flourish  while  a  part  of 
it  is  restricted  or  ceases  to  function.  Germany's  progress  from 
1871  to  1914  is  an  earnest  of  what  she  may  achieve  in  the  coming 
half  century,  not  only  for  herself  but  for  her  former  enemies. 
For  the  prosperity  of  both  France  and  Great  Britain  before  1914 
was  promoted  by  the  activities  of  their  thriving  neighbor.  Whether 
Germany's  prosperity  will  mean  a  renewal  of  military  rivalries 
is  for  her  republican  regime  to  determine.  But  the  lesson  that  in 
modern  warfare,  even  the  victors  lose,  is  not  likely  soon  to  be 
forgotten. ^^ 

**  Memorandum  of  the  German  Delegation,  id. 

Alfred  Lansburgh,  in  Die  Bank,  June,  1919. 

Dr.  Carl  Melchior,  Frankfurter  Zeitung,  Dec.  30,  1919. 


Part  Two 
CURRENCY  AND  CREDIT 

CHAPTER  V 

PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 

A.  Inflation  and  the  Central  Banks  ^ 

i.  Hozu  Inflation  is  Produced 

When  war  loans  are  subscribed  for,  out  of  the  savings  of  the 
public,  inflation  does  not  result.  When  subscriptions  are  made 
out  of  loans  at  the  banks,  inflation  is  produced.  In  the  former 
case,  the  banks  merely  transfer  the  credit  from  the  public  to  the 
government.  The  subscribers  receive  bonds.  The  government  in 
turn  exchanges  the  credit  for  goods  and  services  rendered.  The 
recipients,  munitions  makers  and  others,  return  this  credit  to  the 
banks.  This  procedure  does  not  involve  any  increase  of  deposits. 
Moreover  the  munitions  makers,  themselves  or  through  their 
employees  and  sub-contractors,  may  subscribe  for  bonds  and  repeat 
the  cycle  described.  The  repetition  of  this  operation  makes  it  pos- 
sible for  such  large  amounts  of  loans  to  be  raised.  However,  when 
the  banks  themselves  make  advances  to  their  customers  to  enable 
them  to  subscribe,  credit  is  created.  Similarly  if  the  banks  borrow 
from  or  rediscount  at  the  central  bank,  using  war  paper  as  col- 
lateral, additional  credit  is  created. 

But  credit  is  created  by  means  other  than  subscriptions  out 
of  bank  loans.  During  the  late  war  the  central  banks  of  Europe 
made  direct  advances  to  their  governments,  when  receipts  from 
loans  and  from  taxation  were  inadequate  to  meet  expenses.  The 
government   gave   the  bank   its  securities,  which  became   a  bank 

*  First  Interim  Report  of  the  Committee  on  Currency  and  Foreign 
Exchanges  After  the  War  (Cd.  9182),  1918,  p.  4. 

Address  of  Sir  Edward  H.  Holden  to  the  stockholders  of  The  London 
City  and  Midland  Bank,  Supplement  to  the  Statist,  January  27,  1917. 

173 


174        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

debit  or  asset,  and  in  return  the  government  increased  its  deposits, 
which  were  credits  or  liabilities  on  the  books  of  the  bank.  As 
the  government  drew  on  its  account  to  pay  for  war  goods  and  war 
services,  the  credit,  government  deposits,  was  transferred  to  private 
deposits.  The  above  procedures  constitute  two  methods  of  making 
fiat  credit. 

Inflation  maj'  be  brought  about  through  the  issue  also  of  fiat 
currency.  In  England  the  government  itself  issued  currency  notes, 
which  were  made  legal  tender  but  were  inadequately  backed  by 
gold.  The  French  government  created  fiat  currency  by  a  less 
direct  process.  It  called  upon  the  Bank  of  France  for  notes,  which 
were  issued  against  government  securities.  In  Germany  currency 
was  manufactured  not  only  by  the  government — Reichskassen- 
scheine — but  also  bv  the  war  credit  institutions  which  were  estab- 
lished. 

ii.  Peace  Conditions  vs.  War  Conditions 

In  normal  times  the  inflation  of  credit  is  held  in  check  by 
regulations  which  enable  bankers  to  supply  gold  upon  demand  of 
depositors  or  noteholders.  As  credit  expands,  prices  rise  and  with 
them  the  demand  for  legal  tender  currency,  needed  to  conduct 
the  increased  volume  of  trade.  The  central  banks  of  issue,  then 
raise  the  discount  rate,  which  has  a  double  effect.  Credit  is  con- 
tracted and  prices  consequently  fall,  for  goods  carried  on  credit 
are  forced  on  the  market.  The  decline  in  prices  stimulates  exports 
and  checks  imports  and  thus  causes  an  inflow  of  specie.  Further- 
more, the  rise  in  the  discount  rate  of  the  central  bank  attracts 
foreign  gold.  The  decline  in  the  ratio  of  reserve  to  liabilities  is 
thus  checked.  The  convertibility  into  gold  of  paper  money  and  of 
deposit  credit  restricts  inflation  within  narrow  limits.  During 
the  World  War,  the  belligerents  suspended  gold  payment  and  as 
a  result  the  increase  of  fiat  money  and  fiat  credit  continued  with- 
out check. 

In  times  of  peace,  newdy  established  industries  produce  goods 
for  consumption  which  are  bought  by  wages  paid  in  other  industries. 
In  times  of  w-ar,  munition  plants  produce  no  goods  consumable 
by  wage-earners.  The  stock  of  consumable  goods  remains  station- 
ary or  even  declines,  whereas  the  volume  of  money  increases.  The 
result  is  a  rise  in  prices.  In  times  of  peace,  money  for  new 
industries  comes  from  the  surplus  of  other  industries.     In  times 


PRINCIPLES   AND   PRACTICE   IN   THE    WORLD   WAR  1 75 

of  war,  money  for  new  industries  comes  from  taxation,  or  enforced 
saving,  from  loans,  or  voluntary  savings  diverted  from  industrial 
expansion,  and  from  inflation,  or  stealing  by  the  state.  At 
the  beginning  of  the  war  subscriptions  to  loans  represent  genuine 
transfer  of  control  over  goods  and  services  from  private  hands  to 
the  government.  The  assets  turned  in  represent  real  wealth. 
Toward  the  end  of  the  war  subscriptions  for  bonds  are  made  out 
of  borrow^ings  or  in  the  depreciated  currency  or  credit.  The  sub- 
scriptions represent  not  real  wealth  but  merely  a  share  in  the 
future  goods  and  services  of  the  nation.  In  times  of  peace  the 
mterest  on  an  industrial  bond  represents  genuine  income,  a  portion 
of  the  surplus  of  industry.  But  in  times  of  war  the  interest  on  a 
government  loan  does  not  represent  a  portion  of  a  surplus,  for  the 
expenditures  exceed  the  income  of  the  nation.^ 

B.  Government  Bank  Statements 

i.  Changes   in   Statements   of  Banks   of  Neutral  and  Belligerent 

States 

A  comparison  of  the  statements  of  the  banks  before  the  war 
and  after  the  war  shows  that  the  post-war  holdings  of  specie  were 
1.80  times  the  pre-war  holdings.  Deposits  rose  to  4.53  times  the 
pre-war  figure.  The  notes  of  the  central  banks  increased  to  9.45 
times  the  pre-war  amount  or  if  we  include  the  paper  money  issued 
by  the  governments  themselves,  to  16.53  times.  The  fact  that 
deposits  and  notes  rose  so  much  more  in  volume  than  gold  and 
silver  of  the  central  banks  is  one  of  the  evidences  of  inflation. 
The  liabilities  of  the  banks  increased  more  than  their  real  assets, 
gold  and  commercial  paper.  The  huge  volume  of  government 
promises  to  pay  watered  the  assets.  The  ratio  of  gold  and  silver 
to  notes  and  deposits  of  the  central  banks  declined  from  60.1  per 
cent  before  the  war  to  13.8  per  cent  after  the  war.  These  are  the 
indicators  of  world-wide  inflation,  for  the  Allies,  the  Central 
Powers,  and  the  neutrals  on  the  several  continents  were  all  affected. 
However,  the  problem  cannot  correctly  be  presented  as  a  world 
problem.  The  countries  were  not  equally  affected  and  each  country 
must  be  studied  in  the  light  of  the  causes  and  manner  of  inflation 
within  it.  The  solutions  will  also  be  different  for  the  several  groups. 

^Lansburgh,  A.,  Die  grossen  Notenbanken  in  Dienste  der  Kriegfuhren- 
den  Staaten ;  p.  212.     Die  Bank,  July,  1915,  pp.  499-512. 


176        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  neutrals  and  Inactive  belligerents  show  some  inflation  of 
their  metallic  holdings,  but  their  note  circulation  and  deposits  did 
not  increase  to  a  much  greater  extent  than  did  their  specie  holdings. 
There  was  little  currency  inflation  and  credit  inflation  was  not 
considerably  greater  than  gold  inflation.  In  the  neutral  countries 
listed  the  metallic  holdings  increased  to  2.13  times  the  pre-war 
holdings,  the  deposits  to  3.28  times,  the  circulation  of  the  notes 
of  the  central  banks  alone  to  2.93  times,  and  the  circulation  of 
the  notes  of  both  the  central  banks  and  of  the  government  to  2.43 
times  pre-war  figures.  The  fairly  proportionate  increase  in  specie 
and  in  note  and  deposit  liabilities  is  indicated  by  the  fact  that  the 
ratio  declined  only  from  57.7  to  49.O"  per  cent.  Some  of  the 
neutral  countries,  realizing  that  the  inflation  of  prices  was  due  to 
an  increase  in  the  gold  holdings  of  the  central  banks,  restricted 
the  importation  of  gold. 

The  belligerents  listed  show  a  lesser  increase  in  the  gold  and 
silver  holdings  than  the  neutrals,  a  greater  increase  in  deposits, 
and  a  vastly  greater  increase  in  the  note  circulation  of  the  central 
banks.  If  government  issues  are  included  the  increase  in  notes 
becomes  more  disproportionate  compared  with  the  increase  of  gold. 
The  holdings  of  gold  and  silver  of  the  central  banks  rose  1.75 
times,  the  deposits  4.59  times,  the  notes  of  the  central  banks  II.28 
times,  and  the  total  note  issue,  including  government  notes,  19.76 
times.  The  considerable  margin  between  the  increase  in  note  and 
deposit  liabilities  and  the  increase  in  metallic  holdings  indicated 
inflation  of  credit  and  of  curreno,'.  The  ratio  of  specie  to  note 
&nd  deposit  liabilities  in  the  banks  declined  from  61.2  per  cent 
before  the  war  to  11. 9  per  cent  after  the  war. 

If  the  belligerents  are  grouped,  the  banks  of  the  Allied  Powers 
show  less  inflation  than  those  of  the  Central  Powers.  In  the 
former  case  the  gold  holdings  increased  to  2.01  times  the  pre- 
war amount,  the  deposits  to  3.39  times,  the  bank  notes  to  7.30 
times,  and  all  notes,  including  government  issues,  to  17.58  times. 
The  ratio  of  metallic  holdings  to  note  and  deposit  liabilities  declined 
from  62.0  per  cent  to  21.2  per  cent. 

The  banks  of  the  Central  Powers  present  the  poorest  show- 
ing. The  deposits  increased  to  10.85  times  the  amount  before  the 
war,  the  notes  to  25.74  times,  and  if  government  issues  are  included 
to  28.86  times.  On  the  other  hand  the  specie  holdings  after  the 
war  were  only  0.49  times  the  pre-war  amounts.  As  a  result  the 
ratio  of  gold  and  silver  holdings  to  the  sum  of  note  and  deposit 


PRINCIPLES   AND  PRACTICE   IN  THE   WORLD   WAR  177 

liabilities  declined  from  57.5  per  cent  to  1.3  per  cent.  The 
decrease  in  the  gold  holdings  was  due  to  the  exportation  of  gold 
to  neutral  countries  during  the  war  when  the  credit  of  the  Central 
Powers  was  exhausted,  and  after  the  signing  of  the  armistice  to 
the  surrender  of  gold,  under  the  treaty,  for  the  purchase  of  food, 
and  to  the  theft  by  Roumania. 

ii.  Changes  in  the  Items  on  Bank  Statements 
The  specie  holdings  for  all  the  countries  listed  increased  to 
1.80  times  the  pre-war  amount;  those  of  the  neutrals  and  inactive 
belligerents,  however,  increased  to  2.13  times  and  those  of  the 
belligerents  to  1.75  times  pre-war  holdings.  During  the  war  gold 
moved  from  the  belligerents  to  the  neutrals.  The  holdings  of  the 
Allies  increased  to  2.01  times  the  amount  before  the  war  but  the 
holdings  of  the  Central  Powers  after  the  war  were  only  0.49  as 
great  as  before  the  war.  The  specie  holdings  of  Roumania  increased 
most,  for  the  reason  mentioned  above,  and  those  of  Italy  actually 
decreased.  The  relative  increases  ranged  in  the  following  order: 
Roumania,  Greece,  Japan,  Great  Britain,  United  States,  Russia, 
Portugal,  France,  Finland,  Belgium,  and  Italy.  Turkey  was  the 
only  one  of  the  Central  Powers  which  increased  its  metallic  hold- 
ings (2.19  times).  Austria-Hungary  had  only  0.19  times  the 
gold  holdings  after  the  war  that  it  had  before  the  war.  The 
increase  in  the  gold  holdings  of  the  neutrals  and  the  inactive 
belligerents  varied  less  than  that  of  any  of  the  groups,  if  we 
exclude  Brazil.  Those  of  the  Netherlands  increased  to  3.82  times 
pre-war  holdings.  The  other  countries,  in  the  order  of  increase, 
were  Switzerland,  Denmark,  Norway,  Spain,  Sweden,  down  to 
Argentina  (2.03  times). 

The  deposits  of  the  central  banks  of  all  the  countries  listed 
increased  to  4.53  times  the  total  deposits  before  the  war  But  those 
of  the  neutrals  and  inactive  belligerents  increased  to  only  3.28 
times.  Naturally,  among  the  belligerents  there  was  greater  infla- 
tion than  among  the  neutrals.  The  deposits  in  the  banks  of  the 
belligerent  countries  increased  to  4.59  times,  in  the  banks  of  the 
Allies  to  3.39  times,  and  in  the  banks  of  the  Central  Powers  to 
10.85  times  pre-war  figures. 

Within  the  group  of  Allied  Powers  the  deposits  of  the  bank  of 
Roumania,  increased  most  (83.00  times).  The  deposits  of  the  bank 
of  France  increased  least  (2.38  times),  because  payment  by  check 
had  not  developed  in  France  to  any  great  extent.     The  countries 


178        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

arranged  in  order  of  the  increase  of  deposits  are:  Roumania, 
Belgium,  Japan,  Greece,  Portugal,  Italy,  Finland,  Russia,  Great 
Britain,  United  States,  and  France.  Within  the  Central  Powers, 
the  increase  of  deposits  was  as  follows:  Austria-Hungary  22.00 
times  pre-war  amounts;  Germany,  12.30  times;  Bulgaria,  4.37 
times;  and  Turkey,  1.14  times. 

The  notes  of  the  central  banks  of  issue  in  all  the  countries 
listed  increased  to  9.45  times  pre-war  figures,  but  in  the  neutral 
countries  to  only  2.93  times.  The  note  circulation  in  the  bel- 
ligerent countries  was  increased  to  11.28  times  the  amount  before 
the  war,  that  of  the  Allied  countries  to  7.30  times  and  that  of  the 
Central  Powers  to  25.74  times.  Note  inflation  was  least  among 
the  neutrals  and  greatest  among  the  Central  Powers. 

Within  the  group  of  the  Allies,  the  note  circulation  was 
increased  most  in  Russia  and  least  in  Japan.  The  countries  were 
ranged  in  the  following  order:  Russia,  Roumania,  Finland, 
United  States,  Italy,  Greece,  France,  Portugal,  Belgium,  Great 
Britain,  and  Japan.  Within  the  Central  Powers,  the  note  circula- 
tion of  Austria-Hungary  increased  to  28.20  times  the  pre-war 
circulation,  in  Germany  to  27.36  times,  in  Bulgaria  to  16. 10  times, 
and  in  Turkey  to  2.40  times.  The  increase  in  note  circulation 
in  the  neutral  countries  and  the  inactive  belligerents  did  not  vary 
as  widely  as  in  the  other  groups  and  ranged  from  3.42  times  the 
circulation  before  the  war  in  Norway  down  to  1.69  times  in 
Argentina. 

The  addition  of  the  notes  issued  by  the  governments  them- 
selves to  those  put  out  by  the  central  banks  brought  about  a  greater 
inflation  than  the  above  figures  show.  The  increase  for  all  the 
countries  was  16.53  times  pre-war  amounts  but  only  2.43  times 
in  the  neutral  countries.  The  total  note  circulation  in  the  bel- 
ligerent countries  after  the  war  was  19.76  times  the  amount  before 
the  war,  in  the  Allied  countries  17.58  times,  and  in  the  Central 
Powers  28.86  times. 

The  inclusion  of  government  paper  money  changes  the  position 
of  Great  Britain  from  tenth  to  third  in  the  order  of  the  Allied 
Powers  and  Belgium  from  ninth  to  fifth.  On  the  other  hand  the 
United  States  put  out  practically  no  government  paper  during  the 
war,  and  its  position  declined  from  fourth  to  ninth  in  the  series. 
Among  the  Allied  Powers  Russia  is  first  on  the  list  with  the 
largest  increase  in  the  total  notes  issued,  and  Japan  last.  The 
countries  are  ranged  in  the  following  order:     Russia,  Roumania, 


PRINCIPLES   AND   PRACTICE    IN   THE    WORLD   WAR 


179 


Great  Britain,  Finland,  Belgium,  Italy,  Greece,  France,  United 
States,  Portugal,  and  Japan.  Among  the  Central  Powers  the 
issue  of  paper  by  the  banks  was  so  great  that  even  if  we  include 
the  government  issues  the  increases  are  not  greatly  changed,  except 
for  Turkey.  The  same  applies  to  the  neutrals  and  inactive  bel- 
ligerents. 

Tables  of  pre-war  and  post-war  figures  of  specie,  deposits  and 
note  issues  of  certain  central  banks  are  given  herewith: 


Table  of  Pre-War  and  Post-War  Specie  and  Deposits  of  Important 
Banks  of  Issue  ^ 

(in  million  dollars) 


Pre-war  date 
(A) 

Post-war  date 
ic) 

Specie  Holdings 

Deposits 

Country 
(a) 

Pre- 
war 

id) 

Post- 
war 

(e) 

Ratio 

Pre- 
war 

(g) 

Post- 
war 

U'-) 

Ratio 
(i) 

Allied  Powers 
United  States .... 
Great  Britain .... 

Mar.  30, 1917 
July  29, 1914 
July  30, 1914 
July  31,  1914 
July     8,1914 
Aug.     1,1914 
July  30,1914 
Mar.  13, 1914 
Mar.  29, 1914 
Mar.  31, 1914 
Mar.  31, 1914 

July  23, 1914 
July  30. 1914 
Dec.  3I1I913 
Mar.  31, 1914 

July  16, 1920 
July  14, 1920 
July  IS,  1920 
Feb.  10,  1920 
Oct.   16, 1917 
May  15, 1920 
June  24, 1920 
May  13, 1920 
May    1,1920 
May    5, 1920 
June  15,1920 

947 

186 

920 

288 

937 

109 

61 

4S 

41 

18 

7 

2119 

598 

1126 

223 

1948 

459 

69 

294 

293 

29 

8 

2.24 
3.22 

1-25 

0.77 
2.08 
4.21 
I   13 
6.54 
71S 
i.6i 
r.14 

707 

327 

257 

41 

5  66 

76 

24 

45 

5 

8 

5 

1,687 
872 
611 
152 

1,779 
756 
391 
256 
41S 
41 
17 

2-39 
2.67 
2.38 
3 -70 
3-14 
9.55 

16.30 
5-69 

83.00 
512 
3  40 

Italy 

Japan  

Roumania 

Portugal 

Total    Allied 
Powers 

3S59 

402 

312 

21 

25 

7166 

260 
S8 
46 
10 

2.01 

0.6s 
0.19 
2.19 
0.40 

2061 

22s 

59 
70 

44 

6,977 

2,7S6 

i,2q'; 

80 

192 

3-39 

12.30 

22.00 

1. 14 

4-37 

Centr.\l  Posters 

Germany 

Austria -Hungary . 
Turkey 

June  23, 1920 
Mar.    7, 1920 
Dec.  31,1918 
Feb.  29, 1920 

Total      Central 
Powers 

760 
4319 

224 

125 

21 
68 
14 
246 
29 
38 

374 
754° 

4SS 
31 
61 

261 
40 

S93 
70 

120 

0.49 
I.7S 

2.03 
0.2s 
2.90 
3.82 
2.86 
2.41 
2.41 
3.16 

398 

2459 

2 

4 
96 
18 
10 

4,323 
11,300 

10 
S8 

38 

224 

74 

23 

10. 85 
4.S9 

Total     belliger- 
ents   

Neutrals  (including 
Brazil) 

Argentina 

Brazil 

Mar.  31, 1914 
Mar.  31,  1914 
July  31,1914 
July  25,1914 
July  31,1914 
July  24, 1914 
July  25,1914 
July  23,1914 

May  26  1920 
May  31,  1920 
May  31, 1920 
June  28, 1920 
June  15, 1920 
June  26, 1920 
June  26, 1920 
June  23, 1920 

Denmark 

Netherlands 

29.00 
950 
2-43 
4. II 
2.30 

Sweden 

Switzerland 

Total  neutrals. 

763 
5084 

I63I 
9171 

2.13 
r.8o 

130 
2589 

427 
11,727 

3.28 
4-53 

Grand  total  of 
powers  listed 

I  Based  on  Gottlieb's  figures  in  American  Economic  Review,  Sept.,  1920, 
giving  original  sources. 


i8o 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


Tablb  of  Pre-War  and  Post-War  Circulation  of  Notes  of  Important 
Banks  of  Issue  and  of  their  Governitents 

(in  million  dollars) 


Country 


Bank  Notes  in 
Circulfttion 


Ratio  of  Specie 
to  Note  and 

Deposit 
Liabilities 


Pre- 
war 

(a) 


Post- 
war 
(6) 


Ratio 

(6): (a) 
(0 


Pre- 
war 
(d) 


Post- 
war 
(e) 


l^tal  Bank  and 

Government  Notes  in 

Circulation 


Pre- 
war 


Post- 
war 

(«) 


Ratio 


AixiED  Powers 
United  States. 
Great  Britain . 

France 

Italy 

Russia 

Japan 

Belgium 

Greece . 

Roumania .  . . . 

Portugal 

Finland 


357 

US 

1290 

421 

842 

163 

216 

44 

84 

90 

23 


3,136 

60s 

7,252 

2,974 

9,457 

590 

997 

368 

87s 

433 

234 


417 
5.62 
7.10 

II .  20 
3.56 
4.62 
6.08 

10.42 
4.82 

10.18 


'39.4 
59-5 
62.3 
66.5 
45. 6 
25.4 
50.6 
46.1 
18.4 


Total  Allied  Powers . 


Central  Powers 

Germany 

Austria-Hungary . 

Turkey 

Bulgaria 


367s 


45° 
432 


36 


26,821 


12,294 
12,1 


S8i 


7.30 


27-35 

28.20 

2.40 

16.10 


59. 6 
63 -5 
28.0 
31-3 


Total  Central  Powers . 
Total  belligerents 


Nkutrals  (including  Brazil) 

Argentina 

Brazil 

Denmark 

Netherlands 

Norway 

Spain 

Sweden 

Switzerland 


Total  neutrals . 


Grand    total   of   powers 
listed 


923 
4598 


342 
175 
42 

I2S 

33 

370 
56 
52 


"95 


5793 


25,035 
51,856 


578 
568 
138 
404 
113 
747 
181 
171 


3,900 


54.756 


25-74 
11.28 


1.69 
3-25 
3-28 
3-24 
3-42 
2.02 
3-23 
3-29 


2.93 


9-45 


57-5 
61.2 


43-9 

*40-5 

14-3 

7-1 
17-3 
34-1 

50 
S6-I 
22.7 

6.1 

3-2 


71s 

223 

1290 

518 

842 

163 

216 

44 

84 

90 

23 


21  .2 


1-7 

0-4 

SO-O 

1.3 


4208 


538 

432 

5 

36 


1-3 
11.9 


5 

78 

4 

5 

0 

41 

S 

Sb 

8 

26 

8 

61 

2 

27 

3 

bl 

60.1 


13-8 


101 1 
5219 


342 
175 
42 
125 

3i 

370 
56 
52 


119s 


6414 


4,017 
2,616 
7,252 
3.593 
50,156 

720 
2,059 

268 
2,608 

433 

234 


73,956 


15,720 

12,148 

726 

581 


29,175 
103,131 

578 
568 
138 
404 
113 
747 
181 
173 


a, 902 


106,033 


5 -62 

11-73 
5 -62 
6.94 

59.57 
4.4a 
9-53 
6.09 

31-05 
4.81 

10.17 


17.58 


29.33 

28.12 

145.20 

16.13 


28. 86 
19.76 


1.69 
3-25 
3-29 
3-23 
3-42 
3.02 
3-23 
3-33 


16.  S3 


•  For  the  consolidated  is.sue  and  banking  departments. 

The  ratio  of  metallic  holdings  to  the  sum  of  note  liabilities 
and  deposit  liabilities  of  the  central  banks  shows  the  relative  infla- 
tion. For  all  the  countries  listed  the  ratio  declined  from  60.  i 
per  cent  before  the  war  to  13.8  per  cent  after  the  war.  But  for 
the  neutrals,  the  ratios  before  and  after  the  war  were  57.7  per  cent 
and  49.0  per  cent,  respectively;  the  increase  in  paper  currency 
and  in  deposits  did  not  greatly  exceed  the  increase  in  the  gold 
holdings  of  the  neutrals.     The  ratio  for  the  belligerents  was  61.2 


PRINCIPLES    AND   PRACTICE    IN   THE   WORLD   WAR 


l8l 


per  cent  before  the  war  and  11.9  per  cent  after  the  war.  But  the 
Central  Powers  show  a  worse  disorganization  after  the  war,  the 
ratio  declining  from  57.5  per  cent  to  1.2  per  cent.  For  the  Allied 
Powers  the  ratio  of  metallic  holdings  to  note  and  deposit  liabilities 
combined  declined  from  62.0  per  cent  to  21.2  per  cent. 


C.  Effects  of  Inflation  on  Prices 

The  indices  of  inflation  are  a  rise  in  prices,  a  depreciation  of 
the  rates  of  exchange,  and  a  premium  on  metallic  money.  Only 
the  first  of  the  three  effects  named  will  be  considered  here.  The 
others  will  be  discussed  under  foreign  exchange. 

The  close  relation  existing  between  the  inflation  of  credit 
or  of  currency  and  a  rise  in  prices  becomes  evident  when  the 
increase  in  inflation  is  compared  with  the  increase  in  prices.  A 
table  prepared  in  a  White  Paper  of  the  British  Board  of  Trade 
(Cd.  734  and  434)  shows  a  close  parallelism  between  currency 
expansion  and  price  movements.'*  The  United  States  experienced 
the  least  increase  in  currency  and  the  least  increase  in  wholesale 
and  retail  prices.  France  and  Italy,  on  the  other  hand  showed 
the  greatest  increases  in  currency  and  in  prices. 


Country- 

Latest 
date 

Currency 
of  all  kinds 
(1913  =  100) 

Wholesale 

prices 
(1913  =  100) 

Retail  prices 

of  food 
(1914  =  100) 

United  States 

United  Kingdom.  . 

Switzerland 

Denmark 

Mar.,  1920 
Mar.,  1920 
Dec,  1919 
Jan.,    1920 
Oct.,    1919 
Mar.,  1920 
Feb.,  1920 
Feb.,   1920 
Feb.,  1920 
Dec,  1919 

177 
250 
253 
255 
274 
275 
290 

305 
400 

565 

253  0 
321.8 

266.3 
3S4.0 

522.4 
452.6 

196 
23s 
237 
251 

Japan     

Sweden 

291 
199 

294 

Netherlands 

Norway 

France 

297  (Paris) 
252 

Italy    

*  See  also  the  London  Economist,  Nov.  29,  1919,  p.  978;  June  12,  1920, 
p.  1288. 

Retail  prices  of  food  rose  less  than  general  wholesale  prices  in  part 
because  of  the  policy  of  price-fixing  and  also  because  of  the  subsidizing  of 
food  prices.  In  the  case  of  the  United  Kingdom  the  circulation  at  the 
outbreak  of  the  war,  is  used  as  a  basis  of  comparison. 

Commerce  Reports,  July  30,  1920,  reprinted  a  part  of  this  report 


l82        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  reader  may  find  a  similar  parallelism  by  using  the  price 
indices  and  the  bank  statements  appearing  in  the  Federal  Reserve 
Bulletin. 

The  close  correspondence  between  the  increase  in  the  currency 
and  the  rise  in  prices  in  various  countries  can  be  traced  by  a  com- 
parison of  international  price  fluctuations  before  the  war  and  dur- 
ing the  war.  Prof.  Wesley  C.  Mitchell  showed  that  the  general 
course  of  wholesale  price  fluctuations  in  the  United  States,  Eng- 
land, France,  and  Germany  was,  broadly  speaking,  similar  in  the 
21  years,  1 890-1910.  The  index  numbers  for  these  four  countries 
all  decline  in  the  middle  of  the  nineties  to  the  lowest  point  in  the 
period,  all  rise  in  the  later  nineties,  all  fall  at  some  time  between 
1900  and  1904,  all  rise  sharply  to  a  new  maximum  in  1907,  all  drop 
in  1908,  and  all  rise  once  more  between  1908  and  1910.  During 
the  21  years  the  extreme  differences  in  prices  in  the  four  countries 
were  as  follows :  ^* 


Between  prices  in 

England  and  America 

France  and  America 

Germany  and  America 

England  and  France 

England  and  Germany 

France  and  Germany 


Points 


Year 


10 

1902 

6 

1 901 

7 

1902 

S 

1900 

6 

1900 

8 

1910 

A  point  is  l/iOO  of  a  price  index  number  based  on  the  average 
price  levels  of  1 890- 1899  and  taken  as  100. 

This  close  correspondence  between  prices  in  the  United  States 
and  in  the  three  countries  of  Europe  does  not  hold  for  the  period  of 
the  war.  The  differences  become  far  greater.  The  extent  of  the 
variation  in  prices  corresponds  with  the  degree  of  inflation.  Using 
the  medians  of  relative  prices  of  identical  lists  of  commodities,  150 
in  the  British  comparison,  44  in  the  French  comparison  and  30  in 
the  German  comparison,  Prof.  Mitchell  prepared  average  prices  for 


^^  Mitchell,  Wesley  C,  International  Price  Comparisons.     Washington: 
Government  Printing  Office,  1919,  pp.  13,  17,  18,  29  and  43. 

See  also  his  Index  Numbers  of  Wholesale  Prices  in  the  United  States 
and  Foreign  Countries.  Washington:  Government  Printing  Office,  1915. 
Part  III. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR 


183 


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INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


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PRINCIPLES    AND   PRACTICE   IN   THE   WORLD   WAR 


l8  = 


1 86        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  years    1 91 3   to    1918.     A  condensed  summary   of   his  tables 
follows : 


Comparative  Index  Numbers  of  Wholesale  Prices 


Countries 

1913 

I9I4 

191S 

1916 

1917 

1918 

United  States 

lOI 
lOI 

100 
100 

108 
128 

148 
171 

202 
214 

208 

Great  Britain 

242 

Difference 

0 

lOI 
lOI 

0 

100 
100 

20 

102 
119 

23 

134 
170 

12 

176 
226 

34 

United  States 

201 

France 

268 

Diflference 

0 

lOI 

102 

0 
100 

103 

17 

103 
137 

36 

50 

67 

United  States 

Germany 

Difference 

I 

3 

34 

Great  Britain  shows  the  least  deviation  from  American  prices, 
France  shows  a  considerably  greater  deviation.  For  the  year  1915 
Germany  shows  the  greatest  deviation.  Later  figures  for  Germany 
were  not  compiled.  The  explanation  of  the  spread  in  prices  is  that 
France  resorted  to  fiat  credit  to  a  greater  extent  than  England, 
and  Germany  produced  a  veritable  flood  of  credit  by  means  of 
legislation  at  the  outbreak  of  the  war.  The  table  of  the  British 
Board  of  Trade  as  well  as  that  of  Prof.  Mitchell  corroborates  the 
theory  that  the  expansion  of  the  currency  and  the  rise  in  prices 
closely  parallel  each  other. 

The  International  Financial  Conference  at  Brussels  held  in 
September,  1920,  published  figures  showing  the  percentage  of 
changes  in  prices  and  in  note  issues.  Evidence  of  the  close  paral- 
lelism between  the  increase  of  notes  issued  and  the  increase  of  prices 
is  afforded  by  the  table  showing  these  increases  for  the  years  191 4 
to  1919. 

The  United  States  shows  the  smallest  increase  in  both  prices 
and  note  issues  and  Italy  shows  the  largest  increase.  Price  increases 
lagged  behind  note  increases  except  in  the  United  States,  where 
deposit  banking  has  developed  and  payment  by  check  is  more 
common  than  in  the  other  countries  listed. 


PRINCIPLES  AND   PRACTICE   IN  THE   WORLD  WAR 


187 


Relative  Prices  and  Note  Issues  ^ 
(1913  figures=ioo) 


United  States 

Canada 

Japan 

Sweden 

France 

Italy 

Year 

Prices 

Note 
issues 

Prices 

Note 
issues 

Prices 

Note 
issues 

Prices 

Note 
issues 

Prices 

Note 
issues 

Prices 

Note 
issues 

1914 
191S 
1916 
1917 
1918 
1919 

100 

lOI 
124 

176 
196 

214 

lOI 

109 
124 
151 
IS7 
172 

106 
118 
iSi 
187 
211 
236 

118 
136 

ISS 
206 
239 
251 

91 
108 
131 
1 66 

214 
289 

90 
101 
141 
I9S 
2S6 
296 

116 

14s 
i8s 
244 
339 
330 

131 

149 
190 
253 
360 
329 

116 

206 
309 
358 
429 

117 

233 
292 
391 
53° 
6S2 

101 
170 

234 
365 
437 
457 

129 
181 

227 
3fi6 
40q 
667 

°  Table  C,  p.  9,  Paper  III,  Currency  Statistics,  International  Financial 
Conference,  London:  Harrison  &  Sons,  1920. 


1915 


1916 


1917        19)6         1919        1920       1921 


Figure  IV 

Wholesale  Commodity  Prices  in  Four  Countries 

Average  Prices  in  1913  =  100  Per  Cent 


l88        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

D.  Prospects  and  Remedies 

The  subject  of  reorganization  of  the  finances  of  Europe  will  be 
treated  separately,  but  a  brief  survey  will  be  given  here. 

i.  The  Prospect 

The  new  countries  of  Europe  are  following  the  methods  of 
faulty  finance  which  the  established  nations  pursued  during  the 
war.  Poland,  hardly  a  year  old,  has  a  national  debt  of  mk.  130,000 
million  and  a  budget  deficit  of  mk.  40,000  million.  The  post-war 
period  will  be  marked  by  the  same  developments  as  those  which 
followed  the  Civil  War  and  the  Napoleonic  Wars,  when  specula- 
tion was  rife  and  people  expected  prices  to  remain  at  a  high  level, 
but  deflation  continued  with  only  slight  interruptions  until  the 
pre-war  levels  were  reached. 

The  outlook  is  as  different  for  the  several  countries  as  their 
methods  of  war  finance.  Those  countries  which  did  not  resort  to 
very  extensive  inflation  will  probably  be  able  to  resume  specie  pay- 
ment after  a  relatively  brief  interval,  following  the  example  of 
Great  Britain  after  the  Napoleonic  Wars  and  the  United  States 
after  the  Civil  War.  At  the  other  extreme  are  the  countries  that 
relied  almost  exclusively  on  fiat  credit  and  on  fiat  currency,  for 
whom  the  sole  relief  will  be  some  drastic  measure  such  as  a  capital 
levy,  a  forced  loan,  revaluation  of  the  currency,  or  even  repudia- 
tion. Austrian  krone  notes  were  used  as  labels  on  beer  bottles  in 
Zurich,  Switzerland,  in  1921.  The  countries  between  these  two 
extremes  may  struggle  along  indefinitely  with  a  paper  currency, 
fluctuating  erratically  with  respect  to  gold  like  that  of  various 
countries  in  South  America. 

ii.  Policies 

In  the  present  discussion  of  policies,  only  national  factors  will 
be  taken  into  account.  International  financial  cooperation  seems 
impracticable  and  premature.  As  early  as  August,  191 8,  the  out- 
lines of  a  sound  post-war  financial  policy  were  presented  by  the 
Cunliffe  Committee  in  Great  Britain.  This,  in  general,  was  a 
forerunner  of  later  proposals  in  other  countries,  which  are  in 
substantial  agreement  with  its  recommendations.     There  is  little 


PRINCIPLES   AND   PRACTICE    IN   THE   WORLD   WAR  1 89 

difference  of  opinion  among  students  of  finance  as  to  the  course 
necessary  to  adopt  after  the  war. 

The  Cunliffe  Committee  pointed  out  the  automatic  operation 
before  the  war  of  an  effective  gold  standard  in  correcting  undue 
expansion  of  credit  and  deviation  of  the  foreign  exchange  rates. 
As  a  result  of  government  borrowing  during  the  war  and  of  the 
unlimited  issue  of  paper  currency  the  gold  standard  ceased  to  exist. 
The  committee  recommended  that  an  effective  gold  standard  be 
restored,  otherwise  there  would  be  danger  of  progressive  credit 
expansion  which  would  jeopardize  international  trade  relations. 
The  prerequisites  for  the  restoration  of  an  effective  gold  standard 
were  (a)  the  cessation  of  government  borrowing  and  the  reduction 
of  the  floating  debt,  (b)  the  raising  of  the  discount  rate  of  the 
central  bank  and  its  use  to  check  speculative  expansion  of  credit, 
and  (c)  the  cessation  of  the  issue  of  fiduciary  currency. 

The  official  joint  statement  of  five  of  the  leading  economists 
of  Europe,  submitted  to  the  League  of  Nations,  advocates  the  same 
policy.  The  inflation  of  credit  and  currency  should  cease.  Gov- 
ernment expenditures  must  be  reduced,  not  only  for  the  army  and 
navy,  but  also  for  the  subsidies  on  particular  commodities  and 
services.  The  state  budgets,  must  be  made  to  balance  and  current 
expenses  met,  not  out  of  loans,  but  out  of  income.  Floating  debts 
should  be  funded.  The  creation  of  new  currency  must  cease  and 
with  it  the  artificially  low  bank  rates  abandoned. 

Of  similar  tenor  is  the  Memorandum  of  the  British  Board  of 
Trade,  a  survey  of  the  economic  condition  of  Europe  after  the  war. 
"The  question  primarily  is  the  concern  of  the  several  national 
governments,  assi:ted  where  possible  and  necessary  by  international 
action.  National  solvency  requires  that  public  expenditure  and  re- 
ceipts be  brought  into  equilibrium,  and  that  borrowing,  except  for 
the  most  essential  services,  should  cease.  The  maintenance  of  sound 
currency  equally  demands  the  discouragement  of  all  influences 
tending  to  create  inflation  and  especially  government  borrowings. 
The  withdrawal  of  much  of  the  excessive  depreciated  circulating 
media,  and  the  limitation  of  future  issues  is  equally  one  of  the 
primary  duties  of  the  newly  established  government.  Until  this 
is  achieved  stable  conditions  cannot  be  realized."® 

•Board  of  Trade  Journal,  June  3,  1920,  contr;ins  an  abstract  of  this 
report. 


I  go        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

(a)  Credit  and  Currency  Before  and  During  the  War — 
Before  the  war,  the  volume  of  note  circulation  and  of  deposit 

liabilities  v/as  restricted  by  the  maintenance  of  a  specific  relation 
between  these  liabilities  and  the  gold  reserves  of  the  banks  of  issue. 
A  rise  in  the  discount  rate  caused  the  contraction  of  loans,  and 
therefore  of  deposits,  and  simultaneously  it  increased  the  gold  re- 
serve by  attracting  foreign  funds.  The  Bank  of  France  regulated 
the  gold  supply  not  so  much  by  changing  the  rate  of  discount  as 
by  charging  a  premium  on  gold  to  be  exported. ''^  A  lowering  of 
the  discount  rate  stimulated  enterprise,  increased  loans  and  de- 
posits, and  facilitated  the  export  of  gold. 

During  the  war  the  principle  of  limiting  note  and  deposit  liabili- 
ties by  means  of  the  gold  reserve  was  abandoned.  Gold  payments 
were  suspended  directly  or  indirectly,  practically  everj^vhere.  High 
discount  rates  were  no  longer  needed  to  protect  gold  reserves.  Low 
interest  rates  were  established  to  facilitate  the  financial  operations 
of  belligerent  governments.  The  free  movement  of  gold  before  the 
war  not  only  governed  domestic  credit  and  currency,  but  regulated 
the  foreign  exchanges.  Fluctuations  did  not  exceed  the  cost  of 
settling  in  gold. 

The  results  of  the  abandonment  of  the  gold  standard  were 
twofold.  At  home  inflation  ensued,  prices  rose,  and  government 
credit  was  weakened.  Abroad,  exchange  rates  moved  adversely. 
To  check  the  evils  of  inflation,  price  fixing  and  rationing  were 
introduced  fairly  effectively.  To  overcome  the  effect  of  adverse 
exchange  in  increasing  the  cost  of  imported  essential  goods,  the 
belligerents  sold  securities  accumulated  before  the  war,  raised 
private  loans  abroad,  and  established  a  preferential  discount  rate 
to  attract  foreign  funds,  and  finally  when  these  means  were  ex- 
hausted, the  belligerent  governments  borrowed  of  foreign  govern- 
ments associated  with  them  in  the  war.  All  these  measures  merely 
postponed  and  really  aggravated  the  ultimate  fall  of  exchange  rates 
to  a  level  at  which  they  conformed  to  the  relative  purchasing  power 
of  the  currencies  of  the  several  countries. 

(b)  Post-War  Policies^— 

There  is  little  difference  of  opinion  on  the  point  that  stable 

'  Conant,  p.  65,  5th  Edition. 

^Warburg,  Paul  M.,  Fiscal  and  Currency  Standards  as  the  Future 
Measure  of  the  Credit  of  the  Nations.  Address  before  Second  Pan-Ameri- 
can Financial  Conference,  January  22,  1920. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  IQl 

conditions  can  be  restored  only  by  balancing  budgets  and  as  a  corol- 
lary ceasing  to  issue  further  government  loans  or  additional  paper 
money,  by  digesting  government  loans  and  paper  held  in  the  banks, 
and  by  restoring  the  free  movement  of  gold,^ 

The  free  movement  of  gold  is  the  last  step,  for  gold  exports 
from  a  country  having  huge  note  issues  would  create  financial 
chaos.  The  first  step  toward  a  re-establishment  of  financial 
stability  is  the  balancing  of  the  budget,  by  increasing  income  or  by 
decreasing  expenditure  or  both.  There  is  an  intimate  relation  be- 
tween fiscal  policy  and  financial  stability. 

Through  popular  subscription  provision  must  be  made  for  fund- 
ing the  floating  indebtedness,  and  for  pulverizing  the  large  blocks 
of  government  securities  held  by  the  banks.  With  their  portfolios 
gradually  rid  of  government  loans,  the  banks  become  able  to  place 
their  resources  at  the  service  of  trade.  As  government  paper 
diminishes  among  the  assets  of  the  bank,  the  offsetting  deposit  credit 
is  reduced.  Either  bank  notes  may  be  retired  or  deposits  decreased. 
Popular  loans  will  accomplish  this  result  quickly.  Retirement 
through  taxation,  that  is,  through  an  excess  of  national  revenue 
over  national  expenditure,  will  achieve  this  end  more  slowly.  Under 
either  method  eventually  the  balance  sheets  of  the  banks  will  again, 
as  before  the  war,  show  a  small  per  cent  of  assets  in  government 
securities  and  a  large  per  cent  in  commercial  paper.  When  this 
stage  has  been  reached,  the  effective  discount  rate  may  be  restored, 
gold  shipments  resumed,  and  foreign  exchange  stabilized. 

Those  countries  whose  note  circulation  and  deposit  liabilities 
are  greatly  inflated  can  not  follow  this  procedure.  Many  years 
will  have  to  elapse  before  they  can  retire  the  excess  of  notes, 
either  by  taxation  or  by  funding,  or  reduce  the  holdings  of  govern- 
ment securities,  chiefly  short-term  notes  against  which  deposit 
credits  have  been  created.    For  these  countries  attempts  at  deflation 

*An  occasional  dissenting  opinion  is  registered.  Walter  Leaf,  at  a 
meeting  of  the  stockholders  of  the  London  County  and  Westminster  Bank 
said:  "I  am  no  believer  in  proposals  for  artificial  restriction  of  the  cur- 
rency. To  say  that  the  total  issue  of  treasury  notes  shall  not  exceed  an 
arbitrary  amount  seems  to  me  useless.  So  long  as  the  government  is 
freely  issuing  claims  for  currency,  it  must  supply  the  currency  to  meet 
them.  To  fix  an  upper  limit  would  merely  bring  us  to  a  point  when  the 
banks  would  find  themselves  unable  to  meet  the  demands  for  notes  and 
we  should  have  to  choose  between  bankruptcy  and  a  removal  of  the 
restrictions.  You  can't  cure  a  fever  by  plugging  your  clinical  thermometer 
at  'normal.'"    Financier,  August  ii,  1920. 


192        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Slowly  must  be  abandoned  for  it  is  hopeless  to  try  to  restore  the 
pre-war  gold  value  of  the  monetary  unit.  The  simplest  procedure, 
perhaps  the  only  course  possible,  is  to  revalue  the  monetary  unit 
at  approximately  its  current  value  in  gold  as  was  done  in  the  case 
of  the  Argentine  paper  peso. 

Suggestions  for  stabilization  of  prices  at  their  present  level  are 
futile.  The  free  movement  of  gold  is  possible  only  if  an  inordinate 
amount  is  not  required  for  settling  trade  balances.  The  world 
supply  of  gold  was  adequate  for  this  purpose  before  the  war  when 
prices  were  at  a  lower  level  than  at  present.  The  stabilization  of 
prices  would  necessitate  the  abandonment  of  gold  as  the  governor 
of  the  machinery  of  international  credit.  No  adequate  substitute 
has  ever  jet  been  found.  Some  statesmen  and  publicists  have  advo- 
cated the  maintenance  of  the  inflated  currencies  until  the  volume 
of  goods  produced  is  sufficient  to  require  the  existing  volume  of 
currency.  This  proposal  also  is  futile.  There  are  var>ing  degrees 
of  inflation  in  the  several  countries  and  production  cannot  be  in- 
creased in  varying  proportions  in  each  of  them.  Again  the  rise 
in  the  price  level  during  the  war  was  greater  than  the  price  in- 
creases of  a  century  or  more.  Whereas  sudden  deflation  may  be 
"a  terrible  end,"  the  proposal  to  stabilize  prices  until  time 
overtakes  them  would  constitute  "an  endless  terror."  In  the  rela- 
tion between  goods  and  paper  money,  between  commodities  and 
tokens,  the  former  are  primary,  and  the  latter  must  conform  to 
fluctuations  in  production  and  not  determine  them.  Theoretically, 
present  price  levels  might  be  maintained,  if  a  supply  of  gold  equal 
to  the  existing  supply  of  paper  were  discovered.  Practically, 
stabilization  is  impossible. 


CHAPTER  VI 

BRITISH  CURRENCY  AND  CREDIT 

This  chapter  will  treat  of  as  much  of  the  development  and 
organization  of  British  banking  before  the  war  as  is  necessary 
to  understand  the  main  topics,  namely,  the  eflFect  of  the  war  on 
British  credit  and  currency,  the  legislation  enacted  to  meet  the 
war  emergency,  the  changes  in  the  statements  of  the  Bank  of 
England,  the  effects  of  inflation,  and  the  post-war  policy. 

A.  The  Bank  of  England,  Development  and  Organization 

The  origin  of  the  Bank  of  England^  may  be  traced  to  the  pro- 
posal in  1 69 1  of  William  Paterson,  a  Scotchman,  who  offered  to 
advance  £1,000,000  to  the  government  on  the  condition  that  it 
pay  him  £65,000  annually  to  cover  interest  and  cost  and  that  it  give 
him  authority  to  issue  bills  which  should  be  legal  tender.  The 
act  establishing  "The  Governor  and  Company  of  the  Bank  of 
England"  was  passed  in  1694.  The  checkered  history  of  the  in- 
stitution will  not  be  traced  here.  Until  1826  the  Bank  of  England 
had  a  practical  monopoly  of  all  joint-stock  banking  in  England. 
The  act  of  1826  permitted  the  establishment  of  joint-stock  banks 
of  issue  beyond  the  radius  of  65  miles  from  London.  The  act  of 
1833  permitted  any  corporation  or  partnership  to  carry  on  banking 
in  London  itself  or  within  the  65-mile  radius  on  the  condition  that 
it  did  not  issue  notes.  The  act  of  1844  gave  the  Bank  of  England 
the  exclusive  right  of  note  issue  but  permitted  existing  banks  of 
issue  to  maintain  their  outstanding  circulation  at  the  same  time 
providing  for  the  contingency  of  the  retirement  of  this  circulation. 
In  the  event  of  such  retirement  the  Bank  of  England  might  in- 
crease its  note  issue  by  an  amount  not  in  excess  of  two-thirds  of 
the  bank  notes  retired. 

The  Bank  of  England,  as  remodeled  by  the  act  of  1844,  has  two 
separate  departments,  the  issue  department  and  the  banking  dc- 

'  Conant,  Chap,  it  and  v. 

193 


194        rS'TERNATIOXAL    FIX.\NCE    AND    ITS    REORGANIZATION 

partnient.  The  theon-  of  this  separation  is  that  an  expansion  of 
note  issues  by  private  bankers  had  caused  panics  and  that  therefore 
panics  may  be  prevented  by  confining  the  right  of  issue  to  the  Bank 
of  Er.gland  and  by  limiting  bank  note  issues  above  a  fixed  sum  to 
a  paper  pound  for  every  gold  pound.  The  theory  is  that  notes  and 
deposits  are  distinct  in  their  effect  in  expanding  the  demand  liabili- 
ties of  the  bank,  "The  currency  principle"  was  the  basis  of  the 
separation.  The  bank  note  became  merely  a  certificate  of  coin  and 
commercial  paper  became  the  instrument  of  credit  which  the 
bank  note  previously  had  been,  under  the  regime  of  unrestricted 
issue  by  private  bankers. 

By  the  act  of  1S44  government  securities  to  the  value  of  £14,- 
000,000  were  transferred  to  the  issue  department,  as  well  as  the 
gold  coin  and  bullion  held  in  the  banking  department  in  excess  of 
its  requirement.  The  issue  department  then  turned  over  to  the 
banking  department  the  equivalent  amount  in  notes.  Thereafter, 
notes  and  coin  or  bullion  became  interchangeable  at  a  fixed  rate 
at  the  issue  department.  As  a  result  of  the  retirement  of  the  out- 
standing issues  of  the  joint-stock  banks  the  fiduciary  circulation 
of  the  Bank  of  England  has  increased  from  £14,000,000  to  its 
present  level,  £18.450,000.  The  weakness  of  the  act  was  revealed 
by  the  crisis  of  1847,  when  it  failed  to  function  according  to  the 
theory  of  its  sponsors.  It  did  not  limit  speculation  because  credit 
expansion  was  possible  not  only  through  note  issues  but  also  through 
deposits  and  loans.  Speculation  therefore  was  not  prevented. 
Furthermore  the  theory  that  the  amount  of  gold  would  fluctuate 
with  the  amount  of  notes  likewise  failed  because  gold  was  obtain- 
able at  the  bank,  by  the  presentation  not  only  of  notes  but  also 
of  checks.  Indeed,  the  eftect  of  the  act  in  time  of  panic  was  to 
hasten  the  withdrawal  of  deposits  from  the  joint  stock  banks  before 
the  gold  supply  could  be  withdrawn  by  the  presentation  of  out- 
standing notes.  At  such  occasions  the  bank  act  was  suspended  and 
notes  issued  to  any  desired  extent  without  requiring  a  corresponding 
deposit  of  gold.  The  act  of  1844  which  restricted  note  issues  but 
not  deposits  hastened  the  development  of  deposit  banking.  The 
Cheque  Bank  was  established  soon  thereafter,  received  money  on 
deposit,  and  issued  books  of  checks,  limited  to  the  amount  of  the 
deposit.  Another  development  of  interest  was  the  use  of  a  rise 
in  the  interest  rate  in  inducing  an  inflow  of  funds  and  thus  main- 
taining an  adequate  gold  reserve  in  times  of  stringency  of  credit. 


BRITISH    CURRENCY   AKD   CREDIT  X9S 

English  credit  rests  upon  the  gold  reserve  of  the  Bank  of 
England  because  the  private  and  joint-stock  banks  do  not  maintain 
a  separate  gold  reserve.  They  carry  as  much  cash  as  is  needed  to 
transact  daily  operations  and  carry  the  balance  at  the  Bank  of 
England.  The  jcHnt-stock  bank  rediscounts  at  the  Bank  of  England 
and  can  draw  against  this  deposit  and  obtain  notes,  convertible  into 
gold.  The  Bank  of  England  can  control  the  money  market  not 
only  by  changing  the  discount  rate  but  also  by  borrowing  in  the 
market,  that  is,  by  selling  a  part  of  its  holdings  of  consols  for  cash 
and  buying  an  equal  amount  for  future  delivery  for  the  monthly 
account.  The  excess  funds  of  the  market  are  thus  absorbed,  and 
the  market  rate  for  money  is  forced  up.  The  consols  sold  are 
returned  to  the  bank  at  the  monthly  settlement.^ 

The  Bank  of  England  is  governed  by  24  directors,  a  governor 
and  a  deputy  governor  who  are  usually  senior  directors.  In  addi' 
tion  to  its  banking  functions  the  bank  acts  as  agent  of  the  govern- 
ment, receives  public  deposits  and  acts  as  the  banker  of  the  state, 
though  not  as  its  cashier. 

The  Bank  of  England  is  a  bankers'  bank.  All  the  credit  in- 
stitutions, the  joint-stock  banks,  the  discount  houses,  the  bill  brokers, 
and  the  acceptance  houses  rely  upon  it  for  rediscounting  bills. 
These  bills  may  arise  out  of  trade  with  various  parts  of  the  world. 
In  addition  to  commercial  bills,  finance  bills  are  also  drawn  on 
London  by  bankers  in  many  parts  of  the  world.  London  is  the 
world's  clearing-house  for  foreign  bills.  It  is  a  great  center  in  the 
trans-shipment  or  re-export  trade.  Interest  on  Britain's  vast  foreign 
investments  and  British  loans  to  the  Continent  for  use  in  stock- 
exchange  transactions  before  the  war  were  additional  factors  which 
made  London  a  sort  of  governor  of  the  international  financial  ma- 
chinery. The  British  bank  rate  was  quick  to  register  changes  in 
foreign  financial  conditions. 

B.  War-Time  Legislation  and  Expedients 

The  feature  of  the  days  just  before  the  war,  in  financial  terms, 
was  a  decline  in  stocks  on  the  exchanges  in  Vienna,  in  Berlin  and 
then  in  Paris,  followed  by  the  closing  of  the  stock  exchanges  in 
Vienna,  Budapest,  Brussels,  Antwerp,  Montreal,  Toronto  and 
Madrid  by  July  28.     On  July  29  quotations  were  discontinued  in 

'Conant,  History  of  Modern  Banks  of  Issue,  Fifth  Edition,  p.  137. 


196  INTERNATIONAL    FINANCE   AND   ITS   REORGANIZATION 

Berlin,  the  next  day  the  exchanges  in  Petrograd  and  in  South 
America  closed.  On  July  31  the  stock  exchanges  of  London,  Paris, 
and  New  York  closed.  In  this  chaos,  with  collateral  underlying 
stock-exchange  loans  shrinking,  and  with  British  bills  on  the 
Central  Powers  uncollectible,  the  banks  retrenched,  called  loans 
and  withdrew  funds. 

i.  The  Moratorium 

On  August  2,  for  the  first  time  in  English  history,  a  moratorium 
for  one  month  was  proclaimed,  and  on  August  3  legalized  by  the 
Postponement  of  Payments  Act.  The  law  covering  the  general 
moratorium  reads  (Ch.  II,  4  and  5  Geo.  5)  : 

"His  Majesty  may  by  proclamation  authorize  the  postponement 
of  the  payment  of  any  bill  of  exchange  or  of  any  negotiable  instru- 
ment, or  any  other  payment  in  pursuance  of  any  contract,  to  such 
extent,  for  such  time,  and  subject  to  such  conditions  as  may  be 
specified  in  the  proclamation." 

By  Royal  Proclamation  of  August  6  it  was  directed  that  the 
moratorium  should  not  apply  to  payment  of  wages  or  salary,  a 
liability  not  exceeding  £5,  taxes,  maritime  freight,  debt  from  any 
person,  firm,  company  or  institution  outside  the  British  Islands, 
dividend  or  interest  on  Trustee  Act  Investments,  liability  on  bank 
notes,  old-age  pensions,  or  other  payment  to  be  made  by  the  govern- 
ment, payments  under  the  Insurance  Act  and  under  the  Work- 
men's Compensation  Act,  or  payments  of  deposits  in  savings  banks.^ 

By  a  series  of  proclamations  under  the  moratorium  act,  pay- 
ments which  were  due  up  to  September  3  were  postponed  to  No- 
vember 3.  This,  however,  did  not  apply  to  the  payment  of  rent, 
or  to  the  payment  to  or  by  a  retail  trader.  However,  under  the 
(Emergency  Powers)  Act  of  August  31,  191 4,  "no  person  shall 
proceed  to  execution  on  any  judgment  for  the  recovery  of  a  sum 
except  after  application  to  the  court  or  enter  into  any  property, 
realize  any  security,  forfeit  any  deposit,  or  enforce  the  lapse  of  any 
insurance  policy  for  the  recovery  of  any  sum  of  money  except  after 
application  to  the  court."  The  court  had  discretion  to  stay  execu- 
tion for  such  time  as  it  thought  fit.* 

'Withers,  Hartley,  War  and  Lombard  Street,  pp.  133,  136,  137,  142, 
X45.  Readers  who  lack  access  to  the  British  Statutes  will  find  the  early 
financial  legislation  of  the  war  here. 

*  Withers,  ibid.,  pp.  162-165. 


BRITISH   CURRENCY   AND   CREDIT  197 

The  moratorium  stopped  the  machinery-  of  finance  in  order  to 
avoid  bankruptcies.  Remittances  to  London  from  many  parts  of 
the  world  had  stopped.  The  foreign  exchanges  were  upset  and 
bankers  were  deterred  by  fear  from  discounting  bills.  To  terminate 
the  deadlock  and  to  enable  trade  and  commerce  to  resume  its 
normal  course,  the  Bank  of  England  agreed  to  discount  any  ap- 
proved bill  of  exchange  accepted  before  August  4  without  recourse 
to  the  holder  and  upon  its  maturity  to  assist  the  resumption  of 
normal  business  by  giving  the  acceptor  opportunity  of  postponing 
payment,  interest  being  payable  at  2  per  cent  over  the  bank  rate.^ 

The  Bank  of  England  agreed  to  provide  the  acceptors  with 
funds  to  pay  approved  pre-moratorium  bills  at  maturity,  thus  re- 
leasing the  drawers'  and  endorsers'  of  such  bills  from  their  liability, 
except  their  liability  for  payment  to  the  acceptors.  The  acceptor? 
were  to  collect  from  their  clients  as  soon  as  possible  and  to  apply 
the  funds  to  repay  advances  made  by  the  Bank  of  England,  on 
which  the  interest  charged  was  2  per  cent  above  the  ruling  bank 
rate.  On  its  part  the  Bank  of  England  agreed  not  to  claim  repay- 
ment of  any  amount  not  recovered  by  the  acceptors  from  their 
clients  for  a  period  of  one  year  after  the  close  of  the  war.  Until 
the  end  of  this  period  the  Bank  of  England's  claim  was  to  rank 
after  claims  on  post-moratorium  transactions.  In  order  to  facilitate 
new  business,  the  joint-stock  banks  arranged,  with  the  co-operation 
of  the  Bank  of  England  and  the  government,  to  advance  to  clients 
the  amounts  necessary  to  pay  their  acceptances  at  maturity  where 
the  funds  had  not  been  provided  in  due  time  by  the  clients  of  the 
acceptors.^ 

The  government  guaranteed  the  Bank  against  any  future  losses 
that  it  might  incur  under  this  arrangement  by  agreeing  to  charge 
them  against  the  public  debt. 

ii.  Suspension  of  the  Bank  Act 

The  financial  disturbance  caused  a  withdrawal  of  funds.  De- 
positors, however,  received  only  10  per  cent  in  gold  and  90  per 
cent  in  the  notes  of  the  bank.  However,  these  notes  were  con- 
vertible into  gold  at  the  issue  department,  and  as  there  was  no  bank 

'  Notice  published  on  August  13,  1914,  concerning  the  discounting  oi 
bills  by  the  Bank  of  England. 

'  From  a  Statement  of  the  Treasury,  September  5,  19x4. 


198        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

note  under  £5  note  holders  besieged  the  issue  department  and  de- 
manded gold  coin.  On  August  6  the  bank  act  was  suspended  and 
the  bank  "temporarily  authorized  to  issue  notes  in  excess  of  the 
limit  fixed  by  law";  the  bank  was  discharged  from  any  liability 
in  connection  therewith. 

iii.  Issue  of  Currency  Notes 

The  unlimited  issue  of  notes  of  the  Bank  of  England,  par- 
ticularly had  small  denominations  been  provided  for,  would  have 
satisfied  the  demand  for  notes.  This  course  was  adopted  in  France, 
and  with  the  exception  of  a  small  increase  in  the  Reichskassen- 
scheine  it  was  also  the  course  adopted  in  Germany.  The  issuing 
banks  in  both  cases  merely  increased  the  supply  of  notes,  but  the 
government  issued  none.  England  went  one  step  further.  On 
August  6,  19 1 4,  the  Currency  and  Bank  Note  Act  was  passed. 
This  authorized  the  Treasury  itself  to  issue  currency  notes  for  £l 
and  for  los.  which  would  be  legal  tender  in  any  amount.  To 
meet  the  immediate  exigencies,  postal  money  orders  were  made 
legal  tender  up  to  any  amount.  Legally  and  theoretically,  the 
holder  of  a  currency  note  might  "obtain  on  demand  during  oifice 
hours  at  the  Bank  of  England  payment  for  the  note  at  its  face 
value  in  gold  coin."  This,  of  course,  was  not  the  practice.  Cur- 
rency notes  were  issued  through  the  Bank  of  England  to  bankers 
to  a  maximum  limit  of  20  per  cent  of  their  liabilities  on  deposit  and 
current  accounts.  The  amount  issued  was  treated  as  an  advance 
by  the  Treasury  and  bore  interest  at  the  ruling  bank  rate.  The 
bank  might  repay,  at  will,  notes  advanced.  The  amount  advanced 
was  a  floating  charge  on  the  assets  of  the  bank.  The  banks  might 
obtain  certificates  or  book  credit  with  the  Bank  of  England  in 
lieu  of  and  on  the  same  terms  as  actual  currency  notes.  A  re- 
demption account  for  the  notes  was  opened  consisting  partly  of 
coin  and  bullion.  Bank  of  England  notes  fully  covered  by  gold, 
and  government  balance  at  the  Bank  of  England,  but  chiefly  of 
government  securities. 

C.  The  Bank  of  England  During  the  War 
i.  The  Bank  Statement  and  the  Currency  Situation 

The  statements  of  the  Bank  of  England  during  the  war  furnish, 
in  conjunction  with  the  currency  note  account,  a  picture  of  the 


BRITISH   CURRENCY   AND  CREDIT 


199 


growth  of  inflation.  A  brief  discussion  of  the  form  of  the  state- 
ment of  the  Bank  of  England  will  be  helpful  in  understanding  the 
changes  during  the  war. 

Statement  or  the  Bank  of  England  as  of  September  15,  1930 

(in  thousand  pounds  sterling) 

•   Issue  Department 


Assets 

Liabilities 

ii,oiS 

7,435 
121,558 

Note  issue. 

140,008 

Other  securities 

Gold  coin  and  bullion .... 

Total 

140,008 

140,008 

Ratio  of  gold  to  notes  issued 

Banking  Department 


86.6% 


Government  securities .  . . 
Other  securities 

56,103 

83,391 

14,843 

1,536 

Proprietors'  capital 

Rest  (surplus) 

14,553 

^,'i20 

Notes  

Public  deposits 

Other  deposits  and  bUls. . . 

I';,202 

Gold  and  silver  coLa 

122,589 

Total 

155,873 

155,873 

Ratio  of  gold  and  notes  to  liabilities 1 1 . 9% 

The  Bank  of  England  gives  11.9  per  cent  as  its  ratio  of  re- 
serve to  liabilities.  This  applies  to  the  banking  department  only 
and  is  the  ratio  of  the  notes  and  gold  in  the  banking  department 
to  the  sum  of  its  liabilities,  public  and  other  deposits  and  bills. 
In  the  issue  department,  the  ratio  of  gold  coin  and  bullion  to  notes 
issued  is  86.6  per  cent.  If  now,  the  issue  and  banking  departments 
are  consolidated  and  if  the  notes  held  as  assets  in  the  banking 
department  are  subtracted  from  the  total  note  liabilities  in  the 
issue  department  so  as  to  get  the  net  liability  on  notes  in  circula- 
tion, the  ratio  of  total  gold  and  silver  to  total  note  and  deposit 
liabilities  is  46.8  per  cent.''' 

^  Unaware  of  this  fact,  some  American  business  men  chided  the 
Federal  Reserve  Board  for  raising  the  discount  rate,  and  for  its  inability 
to  operate  on  lower  rates,  with  a  reserve  in  excess  of  40  per  cent,  when 
the  Bank  of  England  was  operating  on  a  reserve,  they  thought,  of  12  per 
cent. 


200        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Statement  or  Issxnt  and  Banking  Departments  Combined  as  of 
Septembee  15,  1930 

(In  thousand  pounds  sterling) 


Gold 

Securities    for    uncovered 

circulation 

Government  securities. . . . 
Other  securities 

123,093 

18,450 
56,103 
83,391 

Proprietors'  capital 

Rest  (surplus) 

Notes  in  circulation 

Deposits  and  bills 

Total 

14,553 

3.529 
125,165 
137,790 

Total 

281,037 

281,037 

Ratio  of  gold  to  combined  deposit  and  note  liabilities 46 . 8% 


Although  the  above  presents  a  true  statement  of  condition  of 
the  Bank  of  England,  it  takes  no  account  of  the  very  large  amount 
of  currency  notes  outstanding,  which  have  contributed  to  inflation 
as  much  as  if  they  had  been  issued  by  the  bank  instead  of  by  the 
government.  The  currency  note  account  is  offset  chiefly  by  govern- 
ment securities  and  to  a  small  extent  by  gold  and  Bank  of  England 
notes. 


Currency  Note  Account  as  of  September  15,  1920 
(in  thousand  pounds  sterling) 


Gold    

28,500 

18,650 

323.975 

150 

Notes  outstanding 

Reserve  account 

354,416 

Bank  of  England  notes. . . 

Government  securities — 

Balance  at  the  Bank  of 

England    

16,859 

Total 

Total                  

371,27s 

371,275 

Ratio  of  the  sum  of  gold  and  Bank  of  England  notes  to  currency 
notes  outstanding 13 . 3% 

To  get  a  true  picture  of  the  condition  of  the  currency  in  Great 
Britain  it  is  necessary  to  merge  the  currency  note  account  of  the 
Treasury  with  the  consolidated  statement  of  the  two  departments 
of  the  Bank  of  England. 


BRITISH    CURRENCY   AND    CREDIT 


SOI 


Statement  of  the  Bank  of  England  (Issue  and  Banking  Departments) 
AND  Currency  Note  Account  of  the  Treasury  Merged  as  of 
September  15,  1920 
(in  thousand  pounds  sterling) 


Gold 

Securities    for    uncovered 
circulation 

Government  securities. . . . 
Other  securities 


Total. 


Proprietors'  capital. 


Surplus  and  reserve  a/c. . . 
Bank  of  England  notes, 

and  currency  notes 

Deposits 


Total . 


14,553 
20,388 

460,931 
137,640 


633,512 


Ratio  of  gold  to  combined  note  and  deposit  liabilities 25 . 3% 

The  merged  statement  of  the  currency  note  account  and  of  the 
combined  departments  of  the  Bank  of  England  is  now  comparable 
to  the  statement  of  the  Bank  of  France,  in  which  country  the  gov- 
ernment issued  no  paper  money  but  relied  upon  the  bank  of  issue 
for  additional  amounts  of  notes. 

ii.  Changes  in  the  Bank  of  England  Statement 

The  statements  of  the  Bank  of  England  during  the  war  present 

clearly  the  changes  in  the  holdings  of  gold  and  of  government 

securities  and  in  the  note  and  deposit  liabilities. 

Statement  of  the  Bank  of  England  ^ 
Issue  and  Banking  Departments  Combined 
(in  million  pounds) 


Items 


Dec. 

31, 
1913 


July 

29> 

1914 


Dec. 
30, 
1914 


Dec. 
29- 
191S 


Dec. 

27, 
1916 


Dec. 

26, 
1917 


Dec. 

35. 
1918 


Dec. 
31. 
1919 


Dec. 

29. 

1930 


Assets 

Gold  and  silver. ........ 

Government  securities: 

Held  by  issue  dep't .  .  . 

Held  by  banking  dep't. 
Other  securities 


38 


18 

IS 

106 


18 

57 

107 


9t 

18 
93 
107 


138 

18 
J08 
86 


Total. 


LlABP.ITlES 

Proprietors'  capital . 

Rest  (surplus) 

Public  deposits 

Other  deposits 

Notes  in  circulation. 


119 


61 
30 


209 


IS 
3 

27 
128 
36 


IS 

3 

50 

112 

35 


236 


15 

3 

52 

127 

39 


IS 

3 

42 

124 

46 


261 


IS 
3 
24 
149 
70 


309 


IS 

3 

19 

i8r 

91 


340 


IS 
3 

14 
17S 
133 


Total. 


Relative  FictniEs 

Gold  and  silver .•.••.•.• 

Government  securities  in 
banking  department .  . . 

Public  deposits 

Other  deposits 

Notes  in  circulation 


119 


100 
ic» 
100 
100 


109 

84 
130 
89 

ICX> 


"S 
270 
210 
120 


2S4 
Soo 


236 


ISS 
438 

S20 
208 
130 


446 
420 
204 

153 


261 


226 

546 
240 
344 
233 


309 


260 

716 
190 

297 
303 


366 

832 
140 

287 
443 


'Weekly  returns  in  London  Economist  and  of  Bank  of  England. 


202        INTERNATIONAL   FINANCE   AND    ITS    REORGANIZATION 


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BRITISH   CURRENCY   AND   CREDIT 


203 


204        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


The  amounts  in  sterling  and  the  relative  figures,  using  the  19 13 
returns  as  100,  show  an  increase  in  gold  in  the  beginning  of  the 
war,  and  a  decline  during  1915  and  1916,  intermittently,  as  a  re- 
sult of  gold  exports  to  pay  for  purchases  in  foreign  countries.  After 
the  United  States  entered  the  war  the  Bank  of  England's  gold 
holdings  increased,  for  British  purchases  were  financed  not  by 
British  gold  but  by  United  States  government  credits.  After  the 
armistice  the  gold  holdings  increased  very  greatly  because  the  seas 
were  again  safe  for  the  unhindered  shipment  of  the  precious  metals 
from  the  mines.  Government  securities  rose  relatively  more  rapidly 
than  any  item  on  the  balance  sheet,  declining  intermittently  after 
the  issue  of  long-term  loans  which  refunded  short-term  securities 
as  well  as  ways  and  means  advances  and  reaching  a  high  point  in 
1920.  The  item,  "other  deposits"  rose  as  public  deposits  were 
reduced  and  distributed  through  payment  by  the  government  of 
the  claims  of  private  companies  and  persons.  Notes  in  circulation 
rose  practically  continuously  following  the  outbreak  of  the  war. 

The  changes  in  the  condition  of  the  Bank  of  England  are  also 
reflected  in  the  ratio  of  the  various  items  to  the  total  assets  or 
liabilities.  Before  the  war  government  securities  constituted  a 
very  small  percentage  of  the  total  assets  but  they  increased  rela- 
tively as  government  finance  displaced  the  demands  of  trade.  On 
the  other  hand,  the  item  "other  securities"  was  the  largest  asset 
item  in  the  bank  before  the  war.  As  a  percentage  of  the  total 
assets  it  rose,  because  of  the  bills  discounted  without  recourse  by 
the  Bank  of  England,  but  declined  thereafter  and  in  both  1919  and 
1920  represented  a  smaller  percentage  of  the  total  assets  than  gold. 
Gold  declined  from  about  33  per  cent  of  the  total  assets  before 
the  war  both  because  of  large  gold  exports  during  1915  and  1916 
and  because  of  the  more  rapid  increase  of  other  asset  items.  The 
lowest  ratio  of  reserves  in  the  banking  department  was  7.30  per 
cent  on  December  30,  1920.  After  the  United  States  entered  the 
war,  and  particularly  after  the  armistice,  gold  became  a  more  im- 
portant asset  and  in  June,  1920,  was  the  largest  of  all. 

Percentage  of  Total  Assets  of  Certain  Items  at  Dates  SPEoriED 


Items 

Dec. 
31, 

1913 

July 
29. 

1914 

Dec. 
30. 
1914 

Dec. 
29. 
191S 

Dec 

27. 
1916 

Dec. 
26, 

1917 

Dec. 
as. 
1918 

Dec. 
31. 

1919 

Dec. 

29. 
1920 

294 

II. I 
43  9 

33   I 

9.6 
41. 1 

i3-2 

71 

50  9 

24.0 

IS. 3 

52.2 

23.0 

24. » 
45 -o 

25-4 

aS-4 
41  3 

30.3 

27.2 
35  4 

29.4 

30- 1 
34.6 

37  T 

Government     securities     in 
banking  department 

31.8 
ij.j 

BRITISH  CURRENCY   AND   CREDIT 


20S 


A  table  showing  the  changes  in  the  three  important  items  in 

the  balance  sheet  of  the  bank  at  intervals  of  four  months  is  given 

herewith. 

Gold,  Notes  and  Securities  of  the  Bank  of  England 

(in  million  pounds  sterling) 

[Source:    London  Economist  weekly  returns;  also  Federal  Reserve  Bulletin, 

Dec,  1917,  Oct.,  1918,  May,  1920] 


Date 


July 

Sept. 
Dec. 

Mar. 
June 
Sept. 
Dec. 

Mar. 
June 
Sept. 
Dec. 

Mar. 
June 
Sept. 
Dec. 

Mar. 
June 
Sept. 
Dec. 

Mar. 
June 
Sept. 
Dec. 

Mar. 
June 
Sept. 
Dec. 


1914 


29. 
30. 
30. 

31- 
30- 
29. 
39. 

29. 
28. 
27. 
27. 

28. 
27. 
26. 
26. 

27- 

26. 
25- 

25- 

26. 

25- 
24- 

31 

31- 
29. 
29. 
29 


191S 


1916 


1917 


1918 


1919 


1920 


Gold  and  silver 

in  issue  and 
banking  dep'ts 

Bank  of  England 

notes  in 

circulation 

Total  securities 
in  banking 
department 

38.0 
52.9 
69- 5 

29.7 
3S-0 
36.1 

58-3 
141. 6 
lai.o 

53-9 

52.2 

61. 5 
Si-S 

35-2 
34-6 
32.8 
35-3 

184.6 
304.0 
163.6 
144-9 

56.7 
61.4 
53-6 
54.3 

33-6 
35-9 
36.5 
39-7 

121. a 

129. 5 
137.6 
163.6 

540 
57-5 
55  I 
58.3 

38.3 
39-4 

41-2 

45-9 

163.6 

145 -5 
151-8 
153 -2 

60.6 
65.2 

71-5 
79.1 

47-8 

53-7 
60.5 

70.3 

168.3 
152-5 
154 -5 
163.2 

843 
87.8 
88.2 
913 

73-6 
78.3 
81.6 
913 

136.4 
147.6 
109.9 
199.2 

112. 2 
117. 9 
123. 1 
128.3 

105-3 

I20.I 

127. 5 

132.8 

129.9 

193-3 
131. 2 

193-9 

The  continuous  issue  by  the  government  itself  of  paper  money 
with  very  slight  security  was  a  potent  cause  of  inflation.  The 
currency  note  issue  was  backed  by  £28,500,000  gold  in  June,  191 5. 
This  amount  has  remained  constant  since,  but  the  amount  of  notes 
outstanding  has  increased  eightfold  since  and  as  a  result  the  ratio 
of  gold  in  the  redemption  account  to  currency  notes  outstanding 


206        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


has  declined  from  a  high  record  of  69.1  per  cent  in  March  of  1915 
to  a  low  record  of  8.3  per  cent  in  June,  1919.  Since  the  latter  date 
the  Bank  of  England  notes  have  been  placed  in  the  redemption 
account  in  increasing  amounts.  As  these  notes  are  covered  by  gold 
to  the  extent  of  about  85  per  cent  they  are  the  equivalent  of  gold 
cover  for  the  currency  note. 

Currency  Note  Redemption  Account 

(in  million  pounds  sterling) 

[Source:  London  Economist] 


Date 


Notes 
outstand- 
ing 

(a) 


Coin  and 
bullion 

(b) 


Bank  of 

England 

notes 

(c) 


Ratio 

'-±'-70 

a 

id) 


Govern- 
ment 
securities 

(e) 


Balance 

at  bank 

of 

England 
(/) 


1914 
Aug.  25 
Sept.  30 
Dec.  30 

191S 
Mar.  31 
June  30 
Sept.  29 
Dec.  29 

1916 
Mar.  29 
June  28 
Sept.  27 
Dec.  27 

1917 
Mar.  28 
June  27 
Sept.  26 
Dec.   26 

1918 
Mar.  27 
June  26 
Sept.  25 
Dec.  31 

1919 
Mar.  26 
June  25 
Oct.      I 
Dec.  31 

1920* 
Mar.  31 
June  30 
Sept.  29 
Dec.   29 


31-5 

28.4 

38.  S 

39-8 

46.6 

72.0 

103.1 


106. 
122. 
131- 
150- 


144-7 
161.7 
178.6 
212.8 

228.1 
252.9 
275.2 
323-2 

328.1 
342.3 
335 -o 
356.1 

335-4 
357-4 
353 -St 
367.6! 


4-5 
18.5 

27-5 
28.5 
28.5 
28.5 

28.5 
28. 5 
28. 5 
28. 5 

28.S 
28. 5 
28.5 
28.5 

28. 5 
28.5 
28.5 
28.5 

28.5 
28.5 
28.5 
28.5 

28.5 
28.5 
28. 5 
28.5 


1-3 

4.0 

S-9 
13-4 
18.7 
195 


15-8 
48.1 

69.1 
61.3 

39-5 
27.6 

26.6 
234 
21.6 
19.0 

19.7 
17.6 
16.0 
13-4 

12. 5 
"-3 
10.4 

8.9 

8.7 
8.3 
8.9 
9.1 

10. o 
11.7 
13-3 
13.0 


9 

20 

54 

71 
88 

99 
118 

no 
132 

153 
186 

202 
229 
253 
305 

308 
327 
317 
337 

313 
331 
332 
336 


n.4 
9-1 
9-3 

35 

8.7 

23.0 

20.5 

7-9 
7.0 
6.0 
6.9 

6.9 

5-6 
5-2 
S-S 

5-8 
S3 
S-i 
4-6 

5-4 
3-3 
3-6 
2.8 

3-0 
0-3 
0.4 
0.1 


•Maximum  fiduciary  issue  for  1920  fixed  at  £320,600,300. 
tincludes  notes  called  in  but  not  yet  canceled. 


BRITISH   CURRENCY   AND   CREDIT 


207 


316 

1 

rv 

• 

British  Currency  Notes  and  Cert  if  ice  fes. 
Compared  wltii  Total  Deposits  and  Note 
Circulation  of  the  Bonk  of  Lng/end 

(Units  cf  £1,000,000) 
•——».--•       Currency  notes  and  cert/ficafea 

300 

1 

J 

Z75 

i 

/ 

250 

J 

/ 

--.-- 

Sentc  <f  Cnq/and  note  c/rcu/ation 

2ZS           , 

t 

1 

irs 

aoo 

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h 

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J 

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ISO 

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1914- 

1915 

19/6 

1917 

1913 

1919 

Figure  VII 

D.  Effects  of  Inflation 

The  increase  of  deposits  in  the  banking  department  of  the  Bank 
of  England  and  the  issue  of  currency  notes  inevitably  led  to  in- 
flation. Evidences  were  not  lacking.  Prices  rose,  wage  increases 
followed.  Gold  bullion  sold  at  a  premium  in  London,  and  the 
balance  sheets  of  the  joint-stock  banks  swelled. 


i.  Increase  of  Prices 

The  Economist  index  number  of  commodity  prices  increased 
more  than  threefold.  The  peak  of  prices  was  reached  in  March, 
1920,  and  prices  declined  very  rapidly  after  that  date. 


308        INTERNATIONAL    FINANCE    ANT)    ITS    REORGANIZATION 


Date 

Economist 

index  number 

Percentage 

Average  1901-5 

2200 

100. 0 

July,            1914 

2565 

116.6 

December,  1914 

2800 

127-3 

December,  1918 

6094 

277.0 

December,  1919 

7364 

334-7 

March,        1920 

8352 

379-6 

October,      1920 

717s 

326.1 

December,  1920 

5924 

269.3 

The  Statist-Sauerbeck  index  number  showed  likewise  a  prac- 
tically continuous  rise  in  prices  until  the  spring  of  1920  and  a 
marked  decline  thereafter. 


Date 

Statist 
index  number 

Average,     1818-27 

1873 
Average,     1880-99 
Average,     1906-15 
June,           1914 
December,  1914 
December,  1918 
December,  1919 
April,           1920 
October,      1920 
December,  1920 

III 
III 

66 

82 

81.2 

91.6 
196.0 
235-2 
266.1 

239-9 

207.2 

The  inde.x  number  of  the  British  Board  of  Trade  showed 
similar  results.  The  fact  that  these  three  British  index  numbers 
are  based  on  different  commodities  explains  the  slight  discrepancies 
in  the  relative  change  between  any  given  dates.  The  Price  Section 
of  the  War  Industries  Board  prepared  tables  of  relative  prices  of 
identical  lists  of  150  commodities  in  the  United  States  and  Great 
Britain.  They  show  a  rise  in  both  countries.  The  United  States 
index  lagged  behind  the  British,  and  as  a  result  of  price  fixing  in 
the  United  States  did  not  increase  much  during  191 7  and  1918. 


BRITISH   CURRENCY   AND    CREDIT 


209 


Medians  of  Relative  Prices  of  Identical  Lists  of  150  Commodities,  m 
Great  Britain  and  in  United  States  * 


(Average  prices  in  year  ending  June,  i 

914 

=  IOC 

) 

1913 

I9I4 

191S 

1916 

1917 

1918 

Period 

Eng. 

U.S. 

Eng. 

U.S. 

Eng. 

U.S. 

Eng. 

U.S. 

Eng. 

U.S. 

Eng. 

u.s 

Year,  total 

First  quarter. . . . 
Second  quarter. . 
Third  quarter. . . 
Fourth  quarter. . 

lOI 

101 

lOI 
lOI 

100 

lOI 
lOI 

100 

lOI 

100 

100 

100 
99 
99 

103 

100 

99 
99 
100 
100 

128 

112 
12s 
133 

140 

108 

100 
103 
III 
117 

171 

158 
170 
i5q 
186 

148 

133 
14s 
147 
1 65 

214 

201 
212 
213 

228 

202 

188 
205 
206 
207 

242 

239 
241 

242 
246 

208 

209 
207 
207 
209 

ii.  Increase  of  Wages 

As  prices  rose  wages  followed.  In  some  industries,  notably  in 
the  manufacture  of  textiles,  wage  increases  were  based  largely  on 
increases  in  the  cost  of  living.  In  the  cotton  industry  at  the  end 
of  February,  1920,  wages  were  about  2.05  times  the  pre-war  level 
although  wage  hours  had  been  reduced  about  13  per  cent.  In  the 
wool  industry  wages  increased  about  2.25  times.  In  the  building 
trades  about  2.06  times  for  bricklayers  and  2.61  times  for  common 
laborers. 

In  the  engineering  and  shipbuilding  trades,  the  wages  of  iron 
moulders  and  shipwrights  rose  to  2.05  times  the  pre-war  wage,  and 
of  unskilled  labor  to  2.80  times.  Wages  in  agriculture  rose  to 
about  2.30  times  pre-war  figures.    Clerical  salaries  about  doubled. 


iii.  Premium  on  Gold 

In  view  of  the  fact  that  during  the  war  gold  was  not  used 
in  domestic  trade  in  Great  Britain,  inflation  could  not  be  measured 
by  the  discount  on  paper  or  the  premium  on  gold,  as  it  was 
measured  in  the  United  States  after  the  Civil  War.  In  foreign 
trade,  however.  Great  Britain  has  from  time  to  time  permitted  the 
exportation  of  gold.  In  maintaining  her  supply  of  gold.  Great 
Britain  has  had  to  bid  for  newly  mined  gold  in  the  international 
market  against  the   Far  East,   South  America,  and  the  United 


•Mitchell,  ibid.,  p.  18. 


2IO        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

States.  The  premium  on  gold  Is  reflected  in  the  price  of  gold  in 
sterling  paper.  At  mint  parity  85  shillings  buy  I  ounce  of  gold. 
The  paper  price  of  gold  has  gone  over  100  shillings  per  ounce,  and 
has  fluctuated  with  the  rate  of  dollar  exchange.^" 


iv.  Increase  in  Accounts  of  Private  Banks 

As  a  result  of  the  policy  in  financing  the  war,  British  Gov- 
ernment securities  became  an  increasingly  important  asset  of  the 
joint-stock  banks.  In  the  consolidated  pre-war  balance  sheet  for 
the  five  leading  banks,  the  London  Joint  City  and  Midland  Bank, 
the  London  County  Westminster  and  Parr's  Bank,  Lloyd's  Bank, 
Barclay  &  Co.,  and  the  National  Provincial  and  Union  Bank  of 
England,  British  Government  securities  constituted  about  6  per 
cent  of  the  total  assets  on  June  30,  19 14,  whereas  on  June  30, 
1920,  they  constituted  about  16  per  cent.  On  the  latter  date,  the 
item  British  Government  securities  was  7.55  times  as  large  as  in 
the  pre-war  balance  sheet.  The  increase  was  practically  continuous. 
The  offsetting  liability,  deposits  and  current  accounts  also  increased, 
but  to  a  less  extent.  Among  the  assets,  bills  of  exchange  declined 
during  the  war,  but  rose  from  191 8  onward.  The  increase  of  this 
item  in  the  191 5  balance  sheet  probably  resulted  from  the 
moratorium,  and  the  subsequent  decrease  resulted  from  the  re- 
striction of  commerce  on  other  than  government  account.  Cash 
in  hand,  which  includes  currency  notes  and  credits  at  the  Bank 
of  England,  increased  after  1914,  and  by  1920  had  risen  to  3.IO 
times  the  pre-war  figure.  In  brief,  government  borrowings  caused 
the  manufacture  of  credit,  and  the  issue  of  currency  notes  in- 
creased the  cash  of  the  joint-stock  banks.  The  paid-in  capital 
and  surplus  increased  as  a  result  of  large  profits  during  the  period 
of  inflation,  but  deposits  increased  more  rapidly.  The  volume  of 
business  done  per  unit  of  capital  increased  from  19 14  to  1 920. 

"On  December  3,  1919,  London  quoted  a  price  of  106  shillings  an 
ounce,  a  premium  of  19  shillings,  or  22  per  cent,  which  likewise  measures 
the  premium  on  New  York  exchange  in  London.  On  December  i6,  1920, 
the  London  rate  for  gold  was  117s.  6d.  and  for  New  York  sight  bills 
$3.50,  a  premium  of  39  per  cent  on  gold  and  New  York  bills  or  a  discount 
of  zS  per  cent  on  paper  and  on  London  bills. 


BRITISH   CURRENCY   AND    CREDIT 


211 


Peincipal  Items  of  Balance  Sheet  of  Leading  Joint  Stock  Banks  " 

(in  million  pounds) 

[Dates  are  for  June  30  of  each  year] 


Assets 

Cash  in  hand  and  with  Bank  of  England.  . 

British  Government  securities 

Bills  of  exchange 

Advances 

Total  assets  (including  items  omitted) 

Liabilities 

Capital 

Reserve 

Current  deposit  and  other  a/c 

Relative  Figures 

Cash  in  hand  and  with  bank 

Government  securities 

Bills  of  exchange 

Advances 

Total  assets 

Current  deposits  and  other  a/c 


I9I4 

191S 

1916 

1917 

1918 

1919 

86 
38 

65 
288 

i6s 
9S 
89 

303 

146 

187 

56 

303 

149 

182 

50 

359 

198 
196 
173 

357 
1107 

28s 
251 
181 
5i6 

632 

778 

827 

876 

1639 

28 

19 

554 

29 

20 

706 

30 

20 
740 

30 

20 
795 

30 

23 

1018 

41 

38 

1505 

100 
100 
100 
100 

195 
254 
137 

174 

497 

86 

loS 

176 

484 
77 

I2S 

234 
521 
269 
124 

335 
667 
279 
179 

100 

123 

131 

139 

174 

255 

100 

127 

133 

143 

184 

272 

1920 


363 
284 

158 

820 
I76I 


57 

45 

1585 


310 

755 
244 
28s 

278 

286 


E.  Post- War  Policy 

In  Januar}',  191 8,  the  Treasurj'  and  the  Minister  of  Recon- 
struction appointed  a  committee  "to  consider  the  various  problems 
which  will  arise  in  connection  with  currency  and  the  foreign  ex- 
changes during  the  period  of  reconstruction  and  to  report  upon  the 
steps  required  to  bring  about  the  restoration  of  normal  conditions 
in  due  course."  In  his  address  to  the  stockholders  of  the  London 
City  and  Midland  Bank  at  the  end  of  January,  19 18,  Sir  Edward 
Holden  recommended  the  consideration  of  the  question  of  the  repeal 
of  the  Act  of  1844  in  order  to  prevent  a  repetition  of  the  breaking 
down  of  the  Act,  and  the  issue  of  currency  notes  to  take  the  place  of 
bank  notes.  Apparently  at  this  suggestion,  the  Committee  on 
Currency  and  Foreign  Exchanges  was  subsequently  authorized  "to 
consider  the  working  of  the  Bank  Act  of  1844  and  the  constitution 
and  functions  of  the  Bank  of  England  with  a  view  to  recommend- 


"  Based  on  returns  of  the  banks,  and  on  the  London  Economist.  See 
Federal  Reserve  Bulletin,  October,  1920,  p.  1044,  and  April,  1920,  p.  374. 
For  methods  of  increasing  cash  reserves  and  the  influence  of  the  war  loan 
see  Industry  and  Finance,  A.  W.  Kiricaldy,  pp.  220,  223,  226,  230. 


212        INTERNATIONAL   FINANCE    AND   ITS   REORGANIZATION 

I'ng  any  alterations  which  may  appear  to  them  to  be  necessary  or 
desirable."  " 

i.  Efficacy  of  Bank  Act  Before  the  War 

The  committee  report  points  out  how  the  Bank  Act  of  1844 
maintained  an  effective  gold  standard  before  the  war.  When  ex- 
change was  favorable,  gold  would  be  imported,  and  legal  tender 
bank  notes  outstanding  would  be  increased  to  meet  the  demands  ol 
trade.  As  prices  rose,  exports  would  decline  and  imports  increase. 
As  exchange  became  adverse,  gold  would  be  exported  and  the 
ratio  of  reserves  to  liabilities  of  the  Bank  of  England  reduced.  If 
it  became  necessary  to  remedy  the  situation,  the  bank  would  raise 
the  rate  of  discount  and  would  thus  retain  gold  within  the  country' 
and  might  even  attract  gold  from  other  countries.  Simultaneously 
credit  would  be  restricted,  goods  carried  on  borrowed  funds  forced 
on  the  market,  and  prices  depressed.  As  a  result  imports  would 
be  checked,  exports  stimulated  and  the  adverse  trade  balance  cor- 
rected. Gold  would  again  flow  into  the  country,  thus  completing 
the  cycle.  This  automatic  machinery  adjusted  British  trade  and 
prices  to  world  conditions. 

ii.   The  Breakdown  of  the  Bank  Act  During  the   War 

As  explained  in  detail  above,  the  Bank  Act  was  suspended,  at 
the  outbreak  of  the  war,  bank  notes  were  no  longer  convertible 
into  gold  upon  demand,  and  the  unlimited  issue  of  currency  notes 
was  authorized.  Therefore  the  extent  of  the  depreciation  of  paper 
was  not  determinable,  in  domestic  transactions  at  least.  Theoret- 
ically the  currency  note  remains  convertible  into  gold.  But  gold 
exports  to  correct  the  exchanges,  if  permitted,  would  soon  exhaust 
the  gold  reserve.  The  depreciation  of  the  exchanges  is  due  to  the 
creation  of  deposit  credit  against  huge  volumes  of  government 
securities,  and  against  commercial  bills  of  importers  in  the  finan- 
cially weak  countries  of  Europe,  which  cannot  be  liquidated  within 
the  usual  trade  term.  Under  conditions  of  depreciated  paper  and 
inconvertibility  into  gold  the  international  position  of  London  in 

"  First  Interim  Report  of  the  Committee  on  Currency  and  Foreign  Ex- 
changes After  the  War,  August,  1918. 

Final  Report,  December,  1919,  and  Treasury  Minute. 

H.  M.  Stationery  Office,  1918,  1919.  Reprinted  in  British  Board  o£ 
Trade  Journal  and  Federal  Reserve  Bulletin, 


BRITISH  CURRENCY  AND  CREDIT  213 

trade  and  finance  is  jeopardized.    The  restoration  of  an  effective 
gold  standard  is  essential. 

iii.  The  Prerequisites  for  the  Restoration  of  the  Gold  Standard 

Credit  may  be  deflated  by  funding  the  floating  debt  through 
popular  subscription,  by  limiting  public  expenditures,  and  by  in- 
creasing production.  The  liquidation  of  bank  loans  will  reduce 
the  offsetting  deposits.  The  reduction  of  government  securities 
held  by  the  banks  and  their  absorption  by  the  public,  by  payments 
against  their  deposit  accounts  will  have  a  similar  effect.  The  pay- 
ment of  taxes  (by  checks)  will  reduce  aggregate  deposits  and  will 
make  it  possible  to  reduce  or  cancel  the  government  short-term 
debt." 

(a)  Cessation  of  Government  Borrowing — 

Ways  and  means  advances,  or  borrowings  by  the  government 
from  the  Bank  of  England,  were  authorized  by  Parliament  and  in- 
tended to  be  a  means  of  providing  funds  not  for  long  periods,  but 
for  temporary  needs,  to  anticipate  assured  revenue  or  contemplated 
permanent  borrowing.  The  government  must  not  only  cease  to 
borrow  further  through  Ways  and  Means  advances,  but  it  must 
repay  those  outstanding,  either  by  taxation  or  by  means  of  public 
subscription  to  long-term  government  loans.  Drummond  Fraser 
has  proposed  the  use  of  continuous  day-to-day  borrowing,  or  the 
sale  of  bonds  by  the  same  methods  as  war  saving  certificates,  as  he 
holds  that  the  need  for  reducing  not  only  ways  and  means  ad- 
vances, but  also  the  floating  and  maturing  debt  puts  too  great  a 
strain  on  the  taxable  capacity  of  the  country. 

Whether  loans  or  taxes  be  resorted  to,  payment  by  check  will 
reduce  the  credit  balance  of  the  depositor  and  thus  the  aggregate 
deposit  of  the  joint-stock  banks  and  their  balance  at  the  Bank  of 
England.  The  Bank  of  England  deposits  will  be  decreased  when 
the  government  securities  it  holds  are  retired. 

(b)  The  Utilization  of  the  Discount  Rate — 

During  the  war  interest  rates  were  kept  low  to  facilitate  gov- 
ernment financing.     To  attract  foreign  funds  while  a  low  rate 

"Address  of  H.  A.  Gibson,  before  the  Economic  Section  of  the  British 
Association,  August  26,  1920. 


214        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


prevailed,  a  differential  rate  was  established  in  their  favor.  The 
Bank  of  England  paid  a  higher  rate  on  its  foreign  funds  borrowed 
than  it  received  on  its  funds  loaned  at  home.  The  bank  rate 
changes  during  the  war  were  as  follows : 


Bank  Rate  Changes  " 


Date  of  change 

1914 

January        8 

January      22 

January      29 

July  30 

July  31 

August  I , 

August  6 

August  8 

1916 

July  13 

1917 

January      18 , 

April  5 

1919 
November    6 

1920 
April  IS 

1921 
April  28 


Duration  in  days 


14 
7 

182 

I 
I 

5 
2 

70s 

189 
77 

94S 

161 

378 


On  June  19,  191 7,  the  bank  paid  4  per  cent  on  deposits  at 
three  days'  notice,  of  clearing-house  banks,  and  on  Februarj'  14, 
191 8,  reduced  the  rate  to  3  per  cent.  However,  on  deposits  made 
with  it  by  joint-stock  banks  of  money  representing  foreign  balances 
on  deposit  with  the  latter,  the  Bank  of  England  maintained  a  rate 
of  43^  per  cent  from  November  15,  191 7,  until  August  29,  1919. 

The  rate  paid  by  the  joint-stock  banks  on  deposits  is  i^  per 
cent  below  the  discount  rate  of  the  Bank  of  England.  In  Novem- 
ber, 1 9 19,  the  discount  rate  of  the  Bank  of  England  was  raised 
from  5  per  cent  to  6  per  cent,  and  on  April  15,  1920,  the  rate  was 
further  raised  from  6  per  cent  to  7  per  cent.  The  aim  was  to  deflate 
credit  and  to  reduce  prices  as  well  as  to  improve  the  exchange 
position  of  sterling,  in  view  of  the  fact  that  Belgian  and  other 
bank  rates  had  advanced.    There  are  two  schools  of  bankers,  who 

"Kirkaldy,  Industry  and  Finance,  p.  215;  also  Stock  Exchange  Official 
Intelligence,  1919,  p.  1745,  and  London  Economist  at  above  dates. 


BRITISH   CURRENCY   AND    CREDIT  21$ 

take  opposite  views  on  the  raise  of  the  rate.  One  group  holds  that 
the  embargo  on  gold  exportation  makes  an  increase  in  the  discount 
rate  unnecessary.  These  bankers  regard  the  needs  of  industry  for 
funds  as  a  primary  consideration  and  favor  the  existing  embargo 
on  gold  exports,  the  removal  of  the  restrictions  on  the  issue  of 
capital  for  domestic  enterprise,  and  the  maintenance  of  a  low  bank 
rate.  They  hold  that  the  raising  of  the  bank  rate  retards  industrial 
recovery,  that  deflation  does  not  lower  prices,  and  that  prices  will 
fall  when  production  exceeds  consumption  or  supply  exceeds 
demand. 

The  other  bankers  favor  a  high  rate  and  advocate  the  removal 
of  restrictions  on  gold  exports.  They  hold  that  the  raising  of  the 
bank  rate  to  lO  per  cent,  if  necessary,  would  check  gold  exports, 
speculation,  and  the  production  of  nonessential  goods,  restrict 
capital  to  enterprises  for  whose  output  there  is  a  demand,  force  the 
sale  of  goods  bought  on  credit,  and  thus  compel  deflation  and  the 
reduction  of  the  price  level.  This  group  also  advocates  a  high 
rate  on  government  borrowing  to  discourage  government  expendi- 
ture, treasury  bills  having  enjoyed  a  preferential  rate  ^  per  cent 
under  the  bank  rate.  The  division  of  opinion  rests  on  the  question 
of  the  advisability  of  slow  or  rapid  deflation,  of  a  mild  or  drastic 
means  to  restore  an  effective  discount  rate.^^ 

(c)   Limitation  of  the  Fiduciary  Issue — 

The  Committee  on  Currency  and  Foreign  Exchange  recom- 
mends that  the  issue  of  fiduciary  currency  be  limited  and  that  the 
arrangements  be  terminated  under  which  deposits  at  the  Bank  of 
England  may  be  exchanged  for  legal  tender  currency  without  affect- 
ing the  reserve  ratio.  It  also  suggests  that  the  note  issue  should  be 
entirely  in  the  hands  of  the  Bank  of  England.  In  the  final  report  the 
committee  recommends  that  the  actual  maximum  fiduciary  circula- 
tion in  any  year  should  become  the  legal  maximum  of  the  following 
year.  A  treasury  minute  gives  effect  to  this  recommendation  by 
directing  the  Bank  of  England  to  restrict  the  issue  of  currency 
notes  during  1920  to  £320,600,000,  except  against  gold  or  Bank 
of  England  notes.    The  committee  further  recommends  that  there 

"Bank  Letter  of  Samuel  Montague  &  Co.,  April  3,  1920.  London 
Economist,  April  5,  1920.  Report  of  H,  G.  Grady,  U.  S,  Trade  Com- 
missioner at  London,  dated  May  5,  1919,  printed  in  Commerce  Reports, 
June  6,  1919. 


2l6        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

should  not  be  any  early  resumption  of  the  internal  circulation  of 
gold  coin,  that  the  gold  reserves  now  held  by  the  banks  should  be 
centralized  and  transferred  to  the  Bank  of  England,  and  that  a 
normal  minimum  of  £150  million  should  be  accumulated  as  a  cen- 
tral gold  reserve.  Until  such  a  reserve  has  been  built  up  and  main- 
tained w^ith  a  satisfactory  foreign  exchange  position  for  at  least  a 
year  the  government  should  reduce  the  uncovered  note  issues. 
When  the  latter  has  been  reduced  to  an  amount  consistent  with 
the  maintenance  of  a  central  gold  reserve  of  £150  million,  the  out- 
standing currency  notes  should  be  retired  and  replaced  by  Bank  of 
England  notes  of  similar  low  denomination.  However,  until  such 
a  point  has  been  reached,  the  committee  does  not  recommend  the 
transfer  of  the  currency  note  issue  to  the  Bank  of  England,  but 
prefers  that  it  remain  a  government  issue.  Should  any  new  notes 
be  required  they  should  be  issued  not  against  government  securities, 
as  was  the  case  during  the  war,  but  against  Bank  of  England 
notes,  which  are  of  too  large  a  denomination  for  general  circula- 
tion. If  Bank  of  England  notes  are  used  as  cover  for  additional 
currency  notes,  the  demands  for  new  currency  would  then  fall  in 
a  normal  way  on  the  banking  department  of  the  Bank  of  England 
and  affect  again,  as  before  the  war,  the  ratio  of  reserves  to  liabilities. 

iv.  Maintenance  of  the  Bank  Charter  Act  of  1844 

Criticism  of  the  Act  of  1844  dates  back  to  three  years  after 
Its  enactment  when  the  first  of  the  panics  which  it  was  to  have 
prevented  occurred.  The  Act  was  intended  to  do  three  things 
(i)  to  curtail  the  issue  of  notes  by  private  bankers  and  the  joint- 
stock  banks,  (2)  to  limit  the  issue  of  notes  by  the  Bank  of  England, 
(3)  to  check  speculation.  Until  1826,  the  Bank  of  England  was 
the  only  joint-stock  bank.  Many  of  the  joint-stock  banks  estab- 
lished later  had  a  doubtful  reputation  in  contrast  to  the  private 
bankers,  whose  notes,  issued  without  legal  restrictions  as  to  cover 
or  total  amount,  were  fully  accepted  by  the  local  public  having 
personal  knowledge  of  the  banker. 

Speculation  through  the  overissue  of  notes  caused  runs  on  the 
banks  and  failures.  Sir  Robert  Peel  expected  that  the  Bank  Act 
would  cure  this  evil,  and  that  above  a  certain  fixed  limit,  dependent 
upon  the  amount  of  notes  then  outstanding  and  necessary,  notes 
would  be  issued  only  against  gold  cover.    He  expected  that  as  gold 


BRITISH    CURRENCY   AND    CREDIT  21 7 

was  paid  out  for  notes,  confidence  would  be  restored.  At  the 
time  the  Act  was  passed  deposit  banking  was  not  extensive  and 
inflation  then  existing  had  been  the  result  of  the  overissue  of  notes. 
Since  then,  credit  banking  has  developed,  and  subsequently  a  point 
that  Peel  had  overlooked  has  become  quite  evident,  namely,  that 
deposits  were  likewise  payable  in  gold  and  credit  inflation  might 
result  in  a  stringency.  The  issue  of  notes  bears  no  relation  to 
the  demand  of  business — to  the  amount  of  commercial  bills.  Under 
the  Act,  if  gold  is  not  deposited  in  the  issue  department  notes 
cannot  be  had,  no  matter  how  much  they  are  needed.  An  extra- 
ordinary demand  for  bank  notes  in  times  of  expanding  business 
falls  on  the  reserves  in  the  banking  department,  the  depletion  of 
which  precipitates  a  crisis. 

Such  crises  did  occur  in  1847,  1857,  1866,  1878  and  subse- 
quently. In  the  three  years  first  mentioned  the  Act  was  broken 
and  notes  issued  without  limit.  Royal  Commissions  twice  investi- 
gated the  failure  of  the  Act  but  no  positive  recommendation  was 
adopted.  The  only  remedy  was  the  toleration  of  the  suspension  of 
the  Act.  Viscount  Goschen  in  1891  advocated  a  plan  to  issue  notes 
upon  reserve  consisting  of  four-fifths  gold  and  one-fifth  securities, 
and  to  withdraw  gold  from  the  public  into  the  reserves  of  the 
bank,  and  proposed  at  the  same  time  that  the  bank  be  authorized 
in  times  of  emergency  to  issue  additional  notes  against  securities 
upon  the  payment  of  a  rate  of  interest  sufficiently  high  to  retire  the 
excess  circulation  when  it  was  no  longer  needed.  The  Reichsbank 
operates  on  this  principle,  which  was  incorporated  in  our  Federal 
Reserve  System.^" 

Sir  Edward  Holden  in  his  address  to  the  stockholders  of  the 
London  City  and  Midland  Bank  in  1918^^  discussed  the  weakness 
of  the  Bank  Act,  and  made  a  number  of  recommendations.  These 
were  strongly  endorsed  by  a  committee  on  Banking,  Currency  and 
Foreign  Exchange  of  the  London  Chamber  of  Commerce,  which 
in  19 1 9  dissented  from  the  report  of  the  official  committee  appointed 
by  the  Treasury.  Sir  Edvrard  Holden  recommended  that  the  two 
departments,  issue  and  banking,  be  consolidated;  that  notes  be 
issued  not  against  gold  but  against  both  gold  and  bills  of  exchange 
so  that  the  note  issue  might  fluctuate  with  the  demands  of  trade; 
that  the  note  issue  bear  a  fixed  relation  to  gold  or  the  cash  balance ; 

"Conant,  5th  Edition,  pp.  134-135. 

"Printed  as  a  Supplement  to  the  Statist,  February  2,  1918. 


2l8        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

that  the  fixed  ratio  of  gold  to  notes  be  lowered  when  necessary  on 
the  payment  of  a  tax;  and  that  the  notes  should  not  exceed  three 
times  the  gold  or  cash  balance.  Many  bankers  in  England  believe 
that  if  these  recommendations,  which  are  substantially  the  principles 
on  which  the  central  banks  of  issue  of  other  countries  are  based, 
had  been  in  effect  before  the  war,  the  declaration  of  the  moratorium 
In  191 4  would  have  been  unnecessary. 

Nevertheless  the  Treasury  Committee  on  Currency  and  Foreign 
Exchanges  recommended  that  the  separation  of  the  issue  and  banking 
departments  of  the  Bank  of  England  should  be  maintained,  and 
that  there  should  be  a  fixed  fiduciary  issue,  beyond  which  notes 
should  be  issued  only  in  exchange  for  gold.  In  its  final  report,  the 
Committee  repeated  its  recommendation  and  added  that  it  had 
considered  the  principles  governing  the  banking  system  of  the  prin- 
cipal foreign  countries  and  was  satisfied  that  they  were  not  so  well 
adapted  to  the  needs  of  England  as  the  Act  of  1844.  Undoubtedly 
the  defense  of  the  Act  by  the  Committee  is  the  weakest  and  most 
vulnerable  part  of  its  report. 


CHAPTER  VII 1 

FRENCH  CURRENCY  AND  CREDIT 

A.  The  History  of  French  Banking 

i.  Development  of  the  Bank  of  France 

In  order  better  to  understand  the  effect  of  the  war  on  French 
credit  and  currency  it  will  be  helpful  to  review  briefly  the  develop- 
ment and  organization  of  the  Bank  of  France.  The  success  of  the 
Bank  of  England  led  to  the  establishment  of  the  Caisse  de  Com- 
merce d'Escompte  du  Commerce  on  March  24,  1776,  under  the 
historic  ministry  of  Turgot,  but  as  a  result  of  the  vicissitudes  of  the 
French  Revolution  the  bank  lost  its  standing  and  was  suppressed 
on  August  24,  1793,  by  decree  of  the  National  Convention.^  On 
January  18,  1800,  Napoleon  created  the  Bank  of  France,  a  bank  of 
issue  and  of  discount,  with  a  capital  of  fr.  30  million.  Three 
years  later  the  bank  was  endowed  with  the  exclusive  right  of  note 
issue  and  the  establishment  of  additional  banks  in  the  departments 
of  France  was  prohibited.  The  fall  of  Napoleon  was  followed  by 
the  creation  of  banks  throughout  the  several  departments  with  the 
right  to  issue  notes,  and  aiming  to  meet  local  needs.  They 
were  officered  by  local  bankers.  These  banks  grew  in  number, 
particularly  in  the  fourth  decade  of  the  century,  and  served  local 
industries  in  a  way  in  which  the  Bank  of  France  did  not,  for  it 
was  regarded  as  a  bankers'  bank,  a  bank  of  rediscount.    The  details 

*  For  collateral  reading,   see  in  addition  to  sources  given  under  the 
chapter  on  French  Public  Finance — 

Bank    of    France    Reports,    Banque    de    France,    Compte    Rendu,    As- 
semblee  Generale  des  Actionnaires,  1914-1920.     Paris:  Paul  Dupont. 

Supplement  to  Commerce  Reports,  7B,  Reports  of  Consul  General  A. 
M.  Thackara,  September  20,  1920. 

Also  Conant,  History  of  Modern  Banks  of  Issue. 

Laughlin,  Credit  of  the  Nations. 

Anderson,  Effects  of  War  on  Money,   Credit  and  Banking  in  France. 

Bogart,  Direct  and  Indirect  Costs  of  the  World  War. 

'  Conant,  Courtois,  Macleod  and  others. 

219 


220        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

of  the  Struggle  between  the  local  banks  and  the  Bank  of  France, 
which  wished  to  establish  branches  in  the  departments,  are  of 
interest  chiefly  in  connection  with  the  peculiar  and  undesirable 
centralization  of  banking  in  France  before  the  World  War. 

In  1848  an  official  decree  provided  for  the  fusion  of  the  banks 
in  the  several  departments  with  the  Bank  of  France,  and  gave  it 
the  exclusive  right  to  issue  notes.  This  provision  resulted  from 
the  lack  of  interchangeability  of  the  note  issues  of  the  banks  in  the 
several  departments  and  from  the  absence  of  clearing  arrangements 
such  as  existed  in  other  countries  for  the  return  of  notes  to  the 
issuing  bank.  The  total  circulation  of  the  Bank  of  France  was 
made  equivalent  to  the  sum  of  the  issues  of  the  banks  fused  with 
it.  The  bank  charter  was  renewed  several  times  under  conditions 
imposed  by  the  government,  such  as  the  requirement  of  the  estab- 
lishment of  branches  within  fixed  periods  of  time  in  all  the  depart- 
ments of  France.  The  last  charter  was  renewed  on  December  20, 
191 8,  and  the  bank's  privilege  to  issue  notes  was  extended  for  25 
years  from  January  i,  1921,  subject  to  greater  participation  by 
the  government  in  profits  of  the  bank  and  to  provisions  for  the 
retirement  of  the  excessive  note  issues.  The  new  charter  also 
provides  for  progressive  taxes  on  the  circulation  and  for  the  pay- 
ment by  the  bank  to  the  government  of  any  excess  dividend  above 
24  per  cent.  Both  these  funds  are  to  be  applied  to  the  industrial 
rehabilitation  of  the  country. 

History  affords  a  precedent  for  the  activities  of  the  Bank  of 
France  during  the  World  War.  During  the  Franco-Prussian  War 
the  bank  suspended  specie  payment  and  issued  inconvertible  notes 
which  were  made  legal  tender.  The  bank  made  advances  to  the 
government  of  fr.  50  million,  secured  by  treasury  bills,  and  total 
advances  during  the  war  amounting  to  fr.   1470  million. 

ii.   Organization  and  Functions  of  the  Bank  of  France 

(a)    Ownership  and  Control — 

The  Bank  of  France  is  privately  owned  but  is  controlled  by 
the  government.  Since  1806  the  state  has  had  the  right  to  appoint 
the  governor  and  two  deputy  governors,  who  are  subject  to  removal 
by  the  Minister  of  Finance.  The  general  control  is  vested  in  the 
governing  board  of  the  bank,  which  consists  of  15  regents  and 
three  auditors.     Its  members  are  elected  at  a  general  meeting  of 


FRENCH   CURRENCY   AND   CREDIT  221 

the  Stockholders,  but  three  of  the  1 5  regents  must  be  selected  from 
among  the  disbursing  agents  of  the  Treasury  and  five  regents  and 
the  three  auditors  must  be  chosen  from  among  the  stockholders. 
Only  200  stockholders,  those  holding  the  largest  number  of  shares, 
are  permitted  to  participate  in  the  annual  meetings.  A  full  state- 
ment of  the  operations  is  furnished  by  the  bank  to  the  government 
every  six  months  and  a  weekly  balance  sheet  is  published  in  the 
Journal  Officiel  every  Friday.  The  governor  and  the  deputy 
governor  are  responsible  for  the  important  measures  taken  by  the 
bank,  such  as  changes  in  the  discount  rate. 

The  bank  receives  public  monies  on  deposit  and  performs  every 
public  service  free  of  charge,  such  as  paying  coupons  on  the  public 
debt  and  issuing  new  loans.  However,  the  bank  does  not  act  as 
an  agent  of  the  state.  It  is  primarily  a  bank  of  issue.  Its  notes 
outstanding  represent  the  largest  part  of  its  liabilities  The  redis- 
counts are  relatively  small. 

(b)  Rate  of  Discount — 

Because,  unlike  the  Bank  of  England,  it  was  not  before  the 
war  so  extensively  a  bank  for  trade,  its  discount  rate  was  less  sensi- 
tive to  changes  in  international  conditions.  The  French  bank  rate 
changed  fewer  times  than  did  the  English.  The  reasons  are  not 
far  to  seek.  Primarily  the  large  gold  reserve  and  the  reluctance 
of  the  Bank  of  France  to  part  with  its  gold  made  it  unnecessary 
to  change  the  rate  of  discount  to  influence  the  gold  supply.  The 
Bank  of  England  operated  on  a  smaller  gold  basis,  and  permitted 
the  free  flow  of  gold  in  and  out,  and  therefore  had  to  rely  more 
heavily  upon  a  sensitive  bank  rate  to  regulate  its  gold  supply  and 
business  conditions  in  general.  The  Bank  of  France  experienced 
to  a  less  degree  the  fluctuating  demands  of  foreign  trade  or  the 
effects  of  the  rediscounts  of  the  joint-stock  banks.  Again,  the 
English  banks  had  larger  deposits,  whereas  the  French  banks  have 
a  relatively  larger  note  circulation.  The  Bank  of  England  had  a 
lower  gold  reserve  and  was  strictly  limited  in  its  power  to  issue 
notes.  The  Bank  of  France  had  very  large  gold  reserves  and  had 
unlimited  power  of  note  issue.  Furthermore,  the  British  relied 
exclusively  upon  the  discount  rate  to  regulate  their  gold  supply, 
whereas  the  Bank  of  France  preferred  to  buy  gold  at  a  loss  rather 
than  to  increase  the  discount  rate.  Again,  as  the  French  discount 
rate  rose  the  government  received  a  progressively  increasing  share 


222        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

of  the  profits,  and  therefore  it  was  to  the  interest  of  the  bank  to 
keep  a  low  rate  of  discount.^  The  bank  might  issue  notes  only 
against  cash  or  legal  loans  and  discounts,  so  that  every  note  was 
covered  either  by  cash  or  assets. 

(c)  Private  Banks — 

Corresponding  to  the  joint-stock  banks  of  England  the  French 
private  banks  serve  the  needs  of  commerce.  These  discount  com- 
mercial bills  and  accept  bills  drawn  upon  them.  Bills  acceptable 
for  rediscount  at  the  Bank  of  France  are  subject  to  a  maximum 
rate  which  is  the  equivalent  of  the  official  rate  of  the  Bank  of 
France.  This  covers  commercial  bills  but  not  loans  on  securities. 
Advances  are  made  against  securities  as  collateral  at  a  slightly 
liigher  rate  than  against  commercial  paper.  The  Bank  of  France 
rediscounts  the  paper  of  the  private  banks  and  therefore  the  latter 
need  carry  but  small  cash  reserves.  The  private  banks  in  addition 
do  an  investment  business.  They  make  advances  on  securities  and 
also  sell  them  to  the  public. 

(d)  Notes  vs.  Deposit  Credit — 

The  Bank  of  France  relied  largely  upon  notes  rather  than  upon 
deposits  in  the  making  of  loans,  because  the  system  of  payment  by 
check  and  of  clearing  houses  was  not  developed  in  France  as  it 
was  in  Great  Britain  and  in  the  United  States.  However,  the 
Bank  of  France  also  did  a  large  business  in  transferring  credits 
between  individuals,  similar  to  the  Giro  Verkehr  in  Germany.  A 
private  bank  will  effect  these  transfers  between  branches  within 
a  city  but  the  services  of  the  Bank  of  France  are  utilized  for 
making  transfers  between  distant  points.  Again,  acceptances  are 
also  media  of  credit  and  to  some  extent  lessen  the  reliance  upon 
the  use  of  notes.  This  reliance  upon  notes  rather  than  upon 
deposits  explains  the  war-time  phenomena  affecting  the  Bank  of 
France. 

(e)  Foreign  Investments — 

Several  other  aspects  of  French  banking  are  relevant  to  the 
financial  changes  resulting  during  the  war.  In  the  United  States 
deposits  grow  out  of  loans;  a  business  man  desiring  to  expand  is 
debited  with  the  amount  of  his  loan  and  credited  correspondingly 

'  Conant,  sth  Edition,  Chapter  III, 


FRENCH   CURRENCY   AND   CREDIT  223 

with  a  deposit.  In  France  deposits  accumulate  in  the  banks  in 
excess  of  the  demands  of  industry.  As  a  result  the  surplus  deposits 
seek  investment  and  are  used  to  a  large  extent  in  foreign  fields. 

Another  factor  which  led  to  investment  abroad  was  the  central- 
ization of  French  banking.  The  struggle  between  the  local  banks 
in  the  several  departments  and  the  Bank  of  France  or  the  few 
large  credit  institutions  finally  resulted  in  the  concentration  of 
banking  facilities.  During  the  decade  around  1840  when  the 
decentralized  departmental  banks  developed  greatly,  industry 
became  very  active.  However,  in  the  generation  before  the  war, 
large  funds  accumulated  in  France  were  not  devoted  to  the  develop- 
ment of  local  industry;  this  would  have  required  widely  scattered 
banks,  staffed  by  local  men  familiar  with  the  local  industrial  needs. 
The  centralization  of  funds  in  a  few  institutions  made  inevitable 
their  investment  in  bonds  of  foreign  countries,  because  of  the 
greater  ease  in  following  the  annual  budget  of  a  few  governments 
rather  than  the  continually  changing  balance  sheets  of  many 
industrial  companies.  This  financial  peculiarity  had  grave  political 
defects.  To  safeguard  her  funds  France  had  to  interest  herself 
unduly  in  the  welfare  and  stability  of  her  debtors.  Her  financial 
interests  were  subservient  to  political  policy.  Until  January  I, 
1 92 1,  the  French  treasury  paid  interest  in  default  on  bonds  guaran- 
teed by  the  Russian  Imperial  Government.  In  1906  and  1911 
France  by  threatening  to  withdraw  her  loans  to  Germany  was  able 
effectively  to  influence  German  military  policy  in  Morocco. 

The  evils  of  this  situation  have  been  pointed  out  time  and 
again.*  M.  Ribot,  in  an  address  before  the  Chamber  of  Deputies 
on  May  17,  191 5,  said,  "A  great  nation  does  not  live  on  interest 
and  dividends  from  foreign  securities.  It  lives  on  labor  and 
industry.  The  extent  of  foreign  investment  is  a  deceptive  measure 
of  a  nation's  riches.  Not  an  abundance  of  capital,  which  it  can 
export,  but  a  support  of  enterprise  which  develops  the  means  of 
production,  is  the  measure  of  a  country's  riches."  The  incentive 
to  invest  abroad  was  the  payment  of  high  commissions  to  the 
bankers  on  poor  securities,  issued  by  second-rate  governments  and 
sold  to  the  thrifty  French  peasant  at  a  low  rate  of  interest  which 
simulated  safety.  On  some  issues  the  underwriters'  margin  ran 
as  high  as  18  per  cent.    It  was  not  unusual  for  the  French  bankers 

*  Herriot,  Boret,  Lysis,  and  others,  cited  in  my  "Labor  and  Reconstruc- 
tion in  Europe,"  pp.  35-40. 


224        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

to  charge  from  7  to  10  per  cent,  in  contrast  to  2  to  3  per  cent 
charged  in  New  York.^  As  we  shall  see  in  the  section  on  foreign 
exchange  the  great  bulk  of  French  investments  were  in  Russia, 
Turkey,  Bulgaria,  and  Mexico,  a  group  distinguished  for  industrial 
imprudence,  financial  ineptitude,  and  political  instability.  The 
outbreak  of  the  war  made  it  impossible  to  realize  on  these  securities 
and  to  use  them,  as  had  been  expected,  as  an  emergency  reserve 
in  case  of  war.  French  credit  was  hurt  as  the  result  of  the  Balkan 
War  and  at  the  outbreak  of  the  World  War,  the  collapse  of  her 
foreign  investments  aggravated  an  already  weak  fiscal  position 
resulting  from  an  increase  of  expenses,  a  rising  debt  and  the  lack 
of  an  expansible  system  of  direct  taxation.  All  these  factors  com- 
bined made  it  inevitable  that  the  financial  reliance  of  France  during 
the  war  should  have  to  be  on  the  issue  of  short-term  loans  and  on 
the  printing  of  paper  money. 


B.  War-time  Financial  Legislation 

i.  The  Moratorium  ' 

The  rumors  of  war  in  the  middle  of  191 4  led  to  a  rapid  decline! 
in  prices  on  the  Paris  Stock  Exchange ;  in  some  cases  a  fall  as 
much  as  40  per  cent.  Securities  became  unsalable  and  stock 
exchange  loans  involved  amounts  of  about  800  million  francs,  on 
both  the  main  exchange  and  the  curb,  the  Parquet  and  the  Coulisse. 
The  freezing  of  stock  exchange  loans  made  it  impossible  to  meet 
maturing  obligations.  On  July  29,  191 4,  the  first  moratorium 
was  decreed  aHFecting  loans  dated  prior  to  August  I,  1914,  and 
maturing  before  August  15.  Then,  three  days  later  the  moratorium 
was  extended  to  bank  deposits  which  could  be  drawn  upon  only 
to  the  extent  of  250  francs  and  of  5  per  cent  of  the  balance. 
Withdrawals  for  the  payment  of  wages  were  exempted  from  this 
provision.  Withdrawals  of  deposits  from  savings  banks  were 
limited  to  50  francs  per  fortnight  per  depositor.     On  August  9, 

'  National  Monetary  Commission,  Doc.  405,  pp.  232  et  seq. 

'Le  Prorogation  des  Echeances,  Econoraiste  Frangais,  January  11, 
March  29  and  April  12,  1919,  pp.  44-47,  396,  459. 

Journal  Officiel,  December  30,  1918,  March  26  and  April  i,  1919. 

Bourbeau,  Marcel,  La  Bourse  des  Valeurs  de  Paris  Pendant  la  Guerre. 
Paris,  Librairie  Generale  de  Droit  ct  de  Jurisprudence,  1921.    Part  I. 


FRENCH   CURRENCY    AND    CREDIT  22$ 

1 91 4,  an  additional  moratorium  was  declared  on  all  negotiable 
instruments,  checks,  bills  of  exchange,  notes  and  warrants,  due 
between  August  i,  191 4,  and  September  i,  19 14.  Negotiable 
instruments  drawn  on  the  Treasury  were  exempt.  On  August 
29,  1914,  a  moratorium  was  declared  on  obligations  of  the  depart- 
ments of  France  and  of  the  communes.  There  was  a  provisional 
moratorium  on  payments  arising  from  the  sale  and  purchase  prior 
to  August  4,  of  rentes,  public  securities  and  other  transferable 
instruments,  as  well  as  the  loans  for  carrying  them  forward. 
However,  the  postponed  payments  bore  interest  at  the  rate  of  5 
per  cent  per  annum.  The  moratorium  also  covered  insurance  con- 
tracts and  the  installments  payable  under  subscriptions  to  the  3^ 
per  cent  loan  issued  before  the  war  began.  A  moratorium  on  house 
rents  was  also  granted.  The  moratorium  was  extended  by  periods 
of  30  days  up  to  November  i,  by  successive  periods  of  60  days 
up  to  May  i,  19 15,  and  thereafter  by  successive  periods  of  90 
days. 

In  January,  1915,  several  banks  lifted  the  moratorium  on 
deposits.  In  October,  191 5,  the  Bourse  moratorium  lapsed  and 
settlements  were  effected  without  difficulty.  The  moratorium  did 
not  apply  to  government  contractors  after  December  23,  1915, 
and  other  beneficiaries  of  the  war  after  September  29,  1 91 6.  The 
general  moratorium  was  lifted  after  December  29,  191 8,  for  the 
rest  of  the  population,  except  for  those  mobilized  or  living  in  the 
devastated  areas.  The  moratorium  on  payment  of  interest  and 
dividends,  amortization  and  principal  of  debts  of  the  departments 
and  communes  was  lifted  April  i,  1920.'''  After  December  16, 
191 6,  no  postponement  was  permitted  unless  for  good  cause.  On 
December  27,  1920,  a  decree  was  enacted  terminating  the  mora- 
torium eighty  months  after  July  31,  1914.^  The  amount  of  bills, 
matured  and  extended,  reached  a  maximum  of  fr.  4476  million 
in  October,  1914,  and  declined  continuously  to  about  fr.  500  million 
in  June,   1920. 

There  are  few  students  of  finance  who  justify  the  wholesale 
use  of  the  moratorium  in  France.  In  view  of  the  rediscount  facili- 
ties of  the  Bank  of  France,  which  its  governors  did  not  hesitate 
to  employ  freely  and  in  further  view  of  the  right  of  unlimited 

'Journal  Officiel,  February  10,  1920. 

*Economiste   Frangais,   January   i,    1921,  p.  9.     Journal   Officiel,  De- 
cember 29,  1920. 


226        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

issue  of  banknotes,  the  moratorium  on  deposits  or  even  on  com- 
mercial paper  cannot  be  defended.  The  moratorium  was  a  con- 
fession of  fear  on  the  part  of  the  bankers,  an  incentive  to  hoarding 
on  the  part  of  the  public,  and  a  damper  on  the  prosecution  of  the 
war.  The  use  of  notes  as  a  means  of  payment  induced  the  mora- 
torium more  than  would  a  system  of  payment  by  checks. 

ii.  Suspension  of  Specie  Payment  and  the  Issue  of  Legal  Tender 

Notes 

As  a  measure  to  supplement  the  moratorium,  specie  payments 
were  suspended  on  August  5,  1914,  in  conformity  with  the  prec- 
edent of  the  Franco-Prussian  War.  The  bank  was  released 
from  its  obligation  to  redeem  its  notes  in  specie.  At  the  same  time 
the  irredeemable  notes  were  made  legal  tender.  The  Bank  of 
France  was  not  limited  in  the  issue  of  notes  other  than  by  the 
flexible  maximum  authorized  by  the  state,  and  therefore  was  not 
under  the  necessity,  like  the  Bank  of  England,  of  suspending  its 
Bank  Act,  or  like  the  Reichsbank,  of  redefining  the  terms,  cash 
and  commercial  paper,  upon  which  its  notes  were  based.  The 
closing  of  the  stock  exchange  and  the  general  moratorium  made 
inevitable  the  suspension  of  specie  payments. 

C.  War  Operations  of  the  Bank  of  France 

i.  Changes  in  the  Statement  of  the  Bank  of  France 

The  effects  of  the  war  were  clearly  reflected  in  the  changes  in 
the  several  items  of  the  Bank  of  France.'' 

The  total  metallic  reserve  in  France  declined  slowly,  from 
fr.  4157  million  at  the  outbreak  of  the  war  to  fr.  3850  million  in 
the  middle  of  1920.  The  total  metallic  reserve  at  home  and 
abroad  increased  considerably,  from  fr.  4157  million  at  the  out- 
break of  the  war  to  fr.  5828  million  in  the  middle  of  1920;  about 
fr.  1950  million  of  gold  was  sent  to  England  as  security  for  loans. 
Total  government  securities  increased  phenomenally  in  the  same 
period,  from  about  fr.  418  million  to  fr.  30,266  million.    Loans  and 

'Econoraiste  Frangais,  1919,  xlvil:  i,  pp.  206,  267,  297,  and  1920,  xlviii: 
')  PP-  393.  423,  457,  489,  covering  operations  during  1918  and  1910. 

Les  Operations  de  la  Banque  de  France  pendant  I'Annee,  1920,  Bulletin 
de  Stadstique  et  de  Legislation  Comparee,  Feb.,  1921,  pp.  232-246. 


FRENCH   CURRENCY    AND    CREDIT 


227 


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FRENCH   CURRENCY   AND   CREDIT 


229 


230        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

discounts,  representing  the  needs  of  commerce,  declined  very  sharply 
after  the  outbreak  of  the  war,  from  fr.  2444  million  to  fr.  213 
million  toward  the  end  of  1914,  and  rose  only  slowly  during  the 
war,  but  by  the  middle  of  1920  almost  equaled  the  pre-war  level. 
Bills  matured  and  extended,  the  item  which  reflects  the  mora- 
torium, reached  their  highest  figure  in  1914  and  declined  con- 
tinuously thereafter;  on  December  10,  1914,  this  item  amounted 
to  fr.  3637  million  and  on  June  24,  1920,  to  only  fr.  523  million. 
Government  deposits  declined  continuously  after  the  outbreak  of 
the  war,  but  the  item,  "other  deposits,"  rose  and  reflected  the 
inflation.  Just  before  the  outbreak  of  the  war  "other  deposits" 
amounted  to  fr.  951  million,  at  the  end  of  191 4  amounted  to  fr. 
2671  million,  ranged  from  about  fr.  2200  to  fr.  2900  million 
during  19 17,  but  rose  considerably  above  these  figures  from  191 8  to 
1920.  Bank  notes  in  circulation  rose  continuously  from  about 
fr.  6683  million  in  1914  to  fr.  37,544  million  in  the  middle  of 
1920. 

The  changes  in  the  leading  items  of  the  statement  of  the 
Bank  of  France  may  be  more  clearly  stated  if  the  figures  are  shown 
relatively,  using  1913  returns  as  100: 


Prtncipal  Items  of  the  Bank  of  France  in  Relattve  Figures 
(Dates  as  given  in  previous  table) 


Items 

1913 

1914, 
July 

1914, 
Dec. 

191S 

1916 

1917 

1918 

1919 

1920, 
June 

24 

Metallic  reserves  at  home.  . 
Metallic    reserves   at    home 

100 

100 
100 
100 

100 

lis 

IIS 
100 
164 
117 

108 

108 
932 
46s 
I7S 

129 

129 

144s 

368 

233 

89 

129 
2300 
393 
292 

86 

13s 

3860 

S06 

391 

90 

139 

5040 

411 

S30 

94 

141 

7190 

S08 

614 

93 
140 

Total  government  securities . 

7240 
622 

658 

The  total  metallic  reserve  in  vaults  of  the  Bank  of  France 
rose  by  the  end  of  1915  intermittently  to  1.29  times  the  1913  level 
but  declined  by  the  end  of  1916  to  0.89  times  the  1913  level,  and 
thereafter  through  1920  did  not  regain  the  pre-war  level.  How- 
ever, the  total  metallic  reserve  at  home  and  abroad  rose  fairly 
continuously  throughout  the  war  and  in  July,  1919,  attained  a 
level  1. 41  times  the  pre-war  figure.  Total  government  securities 
rose  continuously.  These  consisted  chiefly  of  advances  to  the 
government  and  to  a  less  extent  of  treasury  bills  discounted,  that 


FRENCH    CURRENCY   AND    CREDIT 


231 


is  advances  to  foreign  governments.  In  relative  figures,  the  total 
government  securities  at  the  end  of  191 8  when  hostilities  ceased, 
if  one  omits  the  constant  item,  other  government  securities 
was  70  times  the  pre-war  figure  but  by  June  24,  1 920,  had  risen 
sharply  to  loi  times  the  19 13  figure.  Other  deposits  rose  inter- 
mittently but  considerably,  and  by  the  middle  of  1920  were  6  times 
the  pre-war  level.  Bank  notes,  on  the  other  hand,  rose  continu- 
ously, and  after  the  signing  of  the  armistice  were  5.30  times  the 
pre-war  figure,  and  by  June,  1920,  had  risen  further  to  6.58  times 
the  1 913  figure. 


Ratio  of  PRiNcrpAL  Items  to  Total  Assets  or  Liabilities,  in 
Per  Cent 

(Dates  as  given  in  previous  table) 


Items 

Assets 

Total  domestic  reserves . 

Total  government  securities 

Liabilities 

Other  deposits 

Bank  notes 

Ratio    of  Metallic    Reserve  to 

LL'^Bn.ITEES 

Ratio  metallic  reserve  at  home  to 
notes 

Ratio  metallic  reserves  rt  home  to 
notes  and  deposit  liabilities  com- 
bined from  last  statement  in  June 
of  each  year 


I9I3 

1914, 
July 

191S 

1916 

1917 

1918 

1919 

57 
4 

54 
5 

33 

37 

19 

49 

13 

61 

II 

62 

10 

69 

8 
79 

II 

76 

13 
82 

II 

85 

II 

84 

7 

89 

7 
89 

73 

71 

39 

23 

16 

12 

II 

60 

64 

30 

27 

16 

II 

10 

87 


The  varying  fluctuations  in  the  principal  items  in  the  state- 
ment of  the  Bank  of  France  have  greatly  altered  their  relative 
importance.  For  instance  domestic  metallic  reserves  constituted 
57  per  cent  of  the  total  assets  at  the  end  of  1913  and  declined 
continuously  to  9  per  cent  of  total  assets  in  the  middle  of  1920. 
On  the  other  hand  total  government  securities,  which  at  the  end 
of  19 1 3  constituted  only  4  per  cent  of  the  total  assets,  rose  con- 
tinuously to  70  per  cent  by  the  middle  of  1 920.  Since  the  Bank 
of  France  is  principally  a  bank  of  issue  the  bank  notes  were  always 
an  important  item  before  the  war.  At  the  end  of  191 3  they  consti- 
tuted 79  per  cent  of  the  total  liabilities,  but  in  the  huge  inflation 
which  followed  bank  notes  came  to  constitute  89  per  cent  of  the 
liabilities  in  the  middle  of  1918.  The  Bank  of  France  was  noted 
for  the  very  high  percentage  of  gold  to  notes.     Before  the  war 


232        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

this  ratio  was  73  per  cent.  Since  the  gold  abroad  is  held  as 
security  for  large  foreign  loans  we  may  count  only  the  metallic 
reserve  at  home,  and  the  ratio  of  this  figure  to  total  notes  in 
circulation  declined  to  lO  per  cent  by  the  middle  of  1 920.  Or 
using  the  usual  banking  terms,  the  ratio  of  metallic  reserve  to  note 
and  deposit  liabilities  combined  declined  from  59.9  on  June  26, 
1913,  to  9.3  on  June  24,  1920. 

ii.  Gold  Policy 

(a)  The  Pre-War  Conditions — 

Before  the  war  the  reserve  of  the  Bank  of  France  was  large 
both  in  comparison  with  the  other  central  banks  of  issue  and  in 
comparison  with  the  total  notes  issued.  For  a  number  of  years 
previous  to  the  war  the  bank  had  been  increasing  its  gold  reserves 
and  in  the  year  preceding  the  war  the  gold  reserve  had  increased 
from  fr.  3200  million  on  June  26,  191 3,  to  about  fr.  4000  million 
on  July  30,  1 91 4.  In  addition  to  these  fr.  4000  million  there  was 
held  by  the  public  about  fr.  3000  million. ^^  The  problem  as  it 
appeared  to  the  officials  of  the  Bank  of  France  was  not  only  to 
retain  all  the  gold  of  the  bank  but  to  embargo  exports  of  gold  and 
to  withdraw  the  metal  from  circulation. 

(b)  The  Effect  of  the  War— 

Exports  of  gold  were  forbidden  to  everyone  except  the  Bank. 
Like  Germany,  France  inaugurated  a  campaign  for  the  transfer 
of  gold,  held  by  the  public,  to  the  bank  of  issue.  As  a  result 
of  this  propaganda  the  holdings  of  the  Bank  of  France  rose  from 
fr.  41 41  million  at  the  outbreak  of  the  war  to  fr.  5015  million  by 
the  end  of  1915.  By  December  18,  1916,  the  gold  turned  in  by 
the  public  amounted  to  fr.  1948  million. ^^  After  the  outbreak 
of  the  war  the  highest  gold  holdings  were  fr.  5,590,671,000,  re- 
ported September  i,  1920,  and  the  lowest  were  fr.  3,907,363,000, 
reported  May  20,  191 5. 

To  compel  the  surrender  of  gold  the  government  passed  a  law 
demonetizing  the  outstanding  louis  d'or  and  the  half  louis  and 
minting   coints   of   new   design   which    alone   would   be   current. 

"Levy,  Raphael-Georges,  French  Money,  Banking  and  Finance  During 
the  Great  War.  Quarterly  Journal  of  Economics,  November,  191 5. 
Anderson  refers  to  several  other  estimates,  p.  83. 

*^  London  Economist,  December  23,  1916. 


FRENCH   CXIRRENCY  AND   CREDIT  233 

Furthermore,  the  law  prohibited  the  melting  of  these  coins  and 
the  exportation  of  gold  coin  or  bullion.  In  this  way  it  was  hoped 
to  force  into  the  bank  such  gold  as  had  not  been  turned  in  volun- 
tarily during  the  war. 

Gold  was  exported  in  order  to  obtain  credit  in  England  and 
in  order  to  correct  the  exchanges.  At  the  end  of  1918  fr.  2037 
million  of  gold  was  held  abroad  of  which  fr.  1955  million  was 
in  England  to  cover  loans  by  the  Bank  of  England  and  by  the 
British  Exchequer,  to  be  repaid  as  the  French  obligations  to 
England  are  liquidated. ^^  This  gold,  even  though  held  abroad,  was 
still  considered  by  the  French  as  part  of  the  reserves  of  the  Bank 
of  France.  This  procedure  may  be  justified  in  view  of  the  fact 
that  during  the  year  19 19  fr.  59  million  in  gold  was  returned  to 
France  upon  the  repayment  by  the  French  government  to  Great 
Britain  of  credits  amounting  to  £7  million,  or  at  par  about  fr. 
176  million.  However,  about  520  millions  sterling  French 
treasury  bills  are  held  by  the  British  Treasury  and  Bank  of 
England, 

From  July  30,  1914,  to  December  31,  19 1 9,  the  Bank  of 
France  received  fr.  2505  million  of  gold,  which  came  chiefly  from 
circulation,  in  response  to  appeals  to  the  public.  During  the  same 
period  the  Bank  of  France  exported  fr.  1067  million  of  gold  to 
pay  for  war  supplies  and  to  maintain  its  credit  abroad.  The  net 
increase  for  the  period  therefore  was  fr.  1438  million.  Never- 
theless, owing  to  the  increase  in  notes  outstanding,  the  ratio  of 
metallic  reserves  in  vault  to  notes  declined  from  73  per  cent  at 
the  end  of  191 3  to  10  per  cent  in  the  middle  of  1920.  On  Decem- 
ber 26,  1 9 19,  the  Bank  of  France  had  in  its  vaults  fr.  3600  million, 
which  sum  remained  fairly  constant  throughout  1920. 

(c)   An  Appraisal  of  the  French  Gold  Policy — 

The  Bank  of  France  has  been  criticized  for  its  suspension  of 
specie  payment  in  spite  of  the  fact  that  its  ratio  of  gold  to  notes 
was  probably  the  highest  in  Europe  before  the  war.^*  However, 
this  criticism  is  unwarranted  because  the  increase  in  the  note  cir- 

"  Report  of  the  Bank  of  France,  1918.  Economiste  Frangais,  February 
15,  March  i  and  8,  1919,  pp.  206-7,  267-S,  297-300. 

"Anderson,  p.  105,  and  Laiighlin,  p.  151.  For  presentation  of  French 
point  of  view,  see  Guiimard,  Le  role  de  I'or  dans  une  periode  de  guerre. 
Bulletin  de  la  Societe  d'Economie  Politique,  November  4,  1916,  pp.  106- 
118. 


234        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

culatlon  was  more  than  6  times  that  of  the  gold  in  vault.  The 
bank  would  have  been  unjustified  in  suspending  gold  payments  in 
a  commercial  crisis,  but  the  events  of  the  war  and  the  inevitable 
policy  of  financing  the  war  to  a  considerable  extent  by  note  issues 
vindicate  the  policy  of  the  governors  of  the  bank.  Furthermore, 
the  French  policy  was  precisely  the  same  as  that  of  the  British. 
During  the  war  Bank  of  England  notes  were  inconvertible  and 
the  British  currency  notes  were  convertible  only  theoretically. 

Again,  the  Bank  of  France  has  been  criticized  for  not  export- 
ing gold  to  correct  the  adverse  exchanges.  Here  again  the  same 
defense  holds.  The  amount  of  gold  available  was  utterly  inade- 
quate to  be  effective.  Besides,  France  could  not  follow  the  British 
policy  because  Great  Britain  controlled  the  South  African  gold 
mines  and  was  able  to  utilize  newly  mined  gold.  Few  other 
nations  could  do  likewise.  Finally,  during  the  war  the  French 
regarded  their  gold  as  the  last  arrow  in  their  quiver,  and  afterr 
the  war  expected  that  the  resumption  of  specie  payment  would  be 
hastened  as  a  result  of  the  policy  of  husbanding  their  gold  supply. 

The  utility  of  a  large  gold  supply  of  course  is  lessened  by 
the  inconvertibility  of  paper.  The  value  of  paper  money  is  based 
upon  the  possibility  of  obtaining  specie.  However,  when  the  note 
issues  increase  as  greatly  in  relation  to  the  gold  reserves  as  in  the 
case  of  France  the  value  of  the  metallic  reserve  is  chiefly  psychologi- 
cal. The  depreciation  of  paper  currency  is  an  indicator  of  the 
likelihood  of  redemption.  The  larger  the  gold  reserve  the  greater 
is  that  likelihood.  To  some  extent  therefore  the  possession  of  a 
large,  though  inconvertible,  gold  supply  does  help  to  maintain 
the  value  of  depreciated  paper. 

The  gold  program  is  merely  one  phase  of  the  larger  policy  of 
financing  the  war.  As  a  result  of  her  financial  unpreparedness, 
France  could  not  obtain  adequate  revenue  from  taxation  during 
the  war.  This  condition  in  turn  increased  the  difficulty  of  float- 
ing long-term  loans.  Therefore,  France  had  to  rely  upon  note 
issues  and  upon  short-term  treasury  bills,  which,  rediscounted  at 
the  bank,  furnished  a  basis  for  further  note  issues.  France,  how- 
ever, was  no  more  delinquent  than  Great  Britain  in  failing  to 
enforce  a  sound  economic  policy,  to  lessen  the  financial  burden. 
France,  like  England  at  the  beginning  of  the  war,  adopted  the 
policy  of  "business  as  usual"  and  made  no  attempt  to  control 
nonessential  production,  or  to  divert  labor  and  capital  into  the 


FRENCH   CURRENCY   AND   CREDIT  235 

war  industries.  Other  means  of  accomplishing  this  purpose  were 
sought,  namely  the  bidding  up  of  prices  and  the  inflation  of  the 
currency.  Had  France  socialized  her  war  economy,  as  England 
and  the  United  States  did  later  in  the  war,  had  she  restricted  non- 
essential production  by  means  of  embargoes  on  imports  and  exports, 
by  establishing  priority  in  raw  materials,  transportation  and  finance, 
the  need  for  issuing  notes  or  resorting  to  inflation  would  have 
been  greatly  reduced.  The  delinquency  of  France  is  not  distinctive, 
it  is  a  matter  of  degree.  She  erred  more  than  Great  Britain  and 
the  United  States,  not  differently. 

iii.  Advances  to  the  State  ^^ 

Advances  by  the  Bank  of  France  to  the  government  rose  rapidly, 
amounting  to  fr.  3600  million  in  December,  1914,  to  fr.  5000 
million  at  the  end  of  191 5,  and  to  about  fr.  17,000  million  at  the 
close  of  hostilities.  In  the  year  following  the  armistice  the  advances 
rose  to  fr.  25,500  million,  an  increase  equivalent  to  half  the  amount 
advanced  during  four  years  of  war,  and  the  end  has  not  yet  been 
reached. 

(a)  Terms  of  Advances — 

The  Bank  of  France  advances  fr.  200  million  to  the  govern- 
ment without  interest.  Upon  advances  up  to  fr.  21,000  million 
the  bank  charges  0.48  per  cent  interest.  Upon  the  next  fr.  3,000 
million  the  interest  charged  is  0.355  Per  cent  and  above  fr.  24,000 
million  the  bank  receives  3.0  per  cent  interest. 

(b)  Relative  Importance  of  Advances  to  the  State — 

The  bank  advances  amounted  to  fr.  25,835  million,  and  con- 
stituted 12  per  cent  of  the  total  debt,  fr.  215,399  million  on  Decem- 
ber 31,  1919.  The  advances  to  the  state  were  the  largest  part 
of  the  item  "total  government  securities."  At  the  signing  of  the 
armistice  advances  to  the  government  constituted  50.3  per  cent  of 
the  total  assets  of  the  bank,  and  in  the  middle  of  1920  this  item 
had  increased  to  60.1  per  cent  of  the  total  assets.     These  figures 

^Liesse,  Andre,  Les  Avances  de  la  Banque  de  France  a  I'Etat. 
Economiste  Franqais,  May  i,  1920,  pp.  545-547.  The  laws  authorizing 
an  increase  in  the  advances  to  the  state  and  the  simultaneous  rise  in  the 
limit  of  bank  notes  issuable  are  given  in  the  Journal  Officiel  and  quoted 
in  the  Economiste  Francais,  1919-1920. 


236        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

are  of  great  significance  in  judging  the  financial  prospects  of 
France.  The  liquidity  of  the  government  advances,  their  refund- 
ing either  quickly  by  loans  or  over  a  long  period  of  years  out  of 
tax  revenues,  is  essential  to  make  the  bank  again  a  flexible  instru- 
ment of  private  credit. 

(c)  Advances  to  Foreign  Governments — 

In  addition  to  the  advances  to  the  French  government  the 
Bank  of  France  also  discounted  treasury  bills  In  which  form 
advances  were  made  to  foreign  governments,  allied  to  France  In 
the  war.  At  the  end  of  191 5  this  Item  amounted  to  fr.  630  million 
but  Increased  over  fivefold  by  the  end  of  191 8  and  sixfold  by  the 
middle  of  1920,  when  they  amounted  to  about  fr.  3860  million. 
In  the  statement  of  June  24,  1920,  the  advances  to  the  foreign 
governments  constituted  about  9  per  cent  of  the  total  assets  of 
the  Bank  of  France. 

(d)  Repayments  of  Government  Advances — 

The  proceeds  of  long-term  loans  floated  during  the  war  were 
applied  repeatedly  to  the  repayment  In  part  of  the  advances 
of  the  Bank  of  France.  For  Instance  on  November  25,  19 15,  the 
advances  to  the  government  amounted  to  fr.  7400  million  and  by 
December  30,  191 5,  were  reduced  to  fr.  5000  million.  From 
October  26,  191 6  to  November  30,  1916,  the  advances  declined 
from  fr.  8600  million  to  fr.  6500  million.  Again  from  August 
29,  1918  to  November  28,  1918,  the  advances  declined  from  fr. 
19,150  million  to  fr.  17,000  million.  There  were  no  reductions  or 
repayments  up  to  the  spring  of  1920  because  in  the  Interval  between 
the  signing  of  the  armistice  and  the  latter  date  no  long-term  loans 
were  floated.  During  the  war  the  total  amount  of  advances 
repaid  to  the  bank  amounted  to  fr.  8850  million." 

(e)  Advances  After  the  Armistice — 

Under  the  financial  policy  pursued  after  the  armistice  France 
desired  to  avoid  putting  additional  burdens  on  the  taxpayers  or  on 
the  Investment  tmarket  during  the  transition  period  In  order  that 
private  Initiative  might  operate  freely  and  thus  bring  about  the 
return  to  normal  conditions.     This  policy  of  course  involved  an 

"Report  of  the  Bank  of  France,  1918.  Economiste  Fran^ais,  May  24, 
1919,  p.  644. 


FRENCH   CURRENCY  AND   CREDIT  237 

increase  of  advances  by  the  bank  to  the  state,  an  increase  of  notes 
and  a  further  rise  of  prices.  Throughout  the  war  the  manage- 
ment of  the  Bank  of  France  urged  the  Treasury  to  avoid  a  resort 
to  bank  advances  and  note  issues,  but  complied  with  the  requests 
of  the  government.^^  When  the  proceeds  of  the  November,  191 8, 
loan  were  exhausted  the  government  increased  the  maximum 
advances  authorized  from  fr.  21,000  million  to  fr.  24,000  million. 
About  two  months  later,  on  April  24,  19 19,  in  spite  of  the  protests 
of  the  directors  of  the  bank,  they  raised  the  authorized  limit  by 
another  fr.  3,000  million.  The  government,  however,  did  agree 
to  retire  this  amount  out  of  the  proceeds  of  the  next  loan,  thus 
reducing  the  maximum  authorized  to  fr.  24,000  million,  the  limit 
set  on  February  13,  1919.  It  was  not  feasible  to  keep  the  agree- 
ment. At  the  end  of  19 19,  the  total  advances  authorized  were  fr. 
27,000  million  and  the  amount  actually  paid  to  the  state  was  fr. 
25,500  million.  To  this  sum,  however,  must  be  added  treasury 
bills  discounted  by  the  Bank  of  France  for  the  purpose  of  enabling 
the  French  government  to  extend  credit  to  its  Allies.  At  the  end 
of  1919  this  item  amounted  to  fr.  3755  million,  making  a  grand 
total  of  advances  by  the  Bank  of  France  to  the  state  of  fr.  29,255 
million.  At  the  end  of  1920,  advances  to  the  state  rose  to  fr. 
26,600  million,  and  advances  to  foreign  governments  fr.  4,180 
million,  or  a  total  of  fr.  30,780  million. 

(f)   Amortization  Fund — 

Plans  have  been  made  to  reduce  this  enormous  debt  of  the 
state  to  the  bank.  The  law  passed  on  December  20,  1918,^^  renew- 
ing the  privilege  of  the  bank  to  issue  notes  for  25  years  from 
January  i,  1921,  made  provision  for  increasing  the  amortization 
fund.  Under  the  agreement  of  September  21,  19 14,  interest  on 
loans  to  the  government  was  to  rise  from  I  to  3  per  cent  one  year 
after  the  cessation  of  hostilities  and  the  proceeds  were  to  be  applied 
to  an  amortization  fund.  The  bank  was  likewise  to  make  a 
special  contribution  of  50  per  cent  of  the  interest  payable  by  the 
state  on  advances  to  the  French  government  and  85  per  cent  on 

"Jeze,  Gaston,  La  resistance  a  remission  de  papier  monnaie.  Rev. 
Sci.  Leg.  Fin.,  1919,  pp.  219,  et  seq. 

Journal  Officiel,  Chambre,  Debats,  pp.  10,  68,  et  seq.,  March  7,  1919, 
containing  exchange  of  letters  between  the  governor  of  the  Bank  of 
France  and  the  Minister  of  Finance. 

"Journal  Officiel,  December  22.  1918. 


238        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  interest  received  on  advances  to  foreign  governments.  The 
interest  received  by  the  bank  on  advances  to  the  French  govern- 
ment is  as  foUov^^s:  On  a  permanent  loan  of  fr.  200  million,  no 
interest;  on  special  advances  up  to  fr.  21,000  million,  0.48  per  cent; 
on  special  advances  of  the  next  fr.  3000  million,  0.355  per  cent; 
on  special  advances  above  fr.  24,000  million,  3  per  cent  interest 
goes  to  the  amortization  fund.  The  law  has  been  made  retroactive 
to  January  i,  191 8.  The  amount  to  be  contributed  by  the  bank 
to  the  amortization  fund  for  the  period  August  i,  1914,  to  Decem- 
ber I,  191 7,  has  been  fixed  at  fr.  200  million. ^^  By  the  end  of 
191 8  the  bank  had  paid  in  fr.  237  million  out  of  profits  on  advances 
to  the  state  and  on  discounted  treasury  bills  covering  advances  to 
foreign  governments.  The  special  reserve  to  amortize  advances 
amounted  to  fr.  125  million  at  January  i,  1921,  and  is  estimated 
to  be  fr.  800  million  at  the  end  of  1921.  According  to  an  agree- 
ment on  April  14,  1920,  between  the  IVIinister  of  Finance  and 
the  governor  of  the  Bank,  the  limit  of  the  advances  should  have 
been  reduced  by  January  i,  1921,  from  27,000  to  24,000  million 
francs.  This  was  not  feasible,  and  on  December  16,  1920,  a  new 
agreement  provided  that  the  limit  be  maintained  at  fr.  27,000 
million  till  January  I,  1922.  The  government  undertook  to  repay 
fr.  2000  million  before  that  date  and  a  like  sum  annually  there- 
after.-" Whether  this  contract  can  be  carried  out  unrevised 
remains  to  be  seen. 

iv.  Loans  and  Discounts 

(a)   Decline  During  the  War — 

Loans  and  discounts,  which  represent  the  commercial  activities 
of  the  Bank  of  France,  increased  from  fr.  1527  million  on  Decem- 
ber 26,  1913,  to  fr.  2444  million  on  July  30,  1914,  owing  to  the 
heavy  rediscounts  by  the  Bank  of  France  because  of  the  war  scare. 
A  very  sharp  decline  followed  and  on  December  lO,  19 14,  it 
amounted  to  only  fr.  213  million.  Not  until  after  the  war  did 
this  item  reflect  the  resumption  of  commercial  activity. 

On  June  27,  1918,  there  was  a  rise  to  fr.  1360  million,  and  a 
decline  subsequently  to  fr.  1002  million  on  August  8,  191 8,  and 
further  to  fr.  875  million  on  June  26,  1919.     The  resumption  of 

"Thackara,  A.  M.,  ibid.    Also  Report  of  Bank  of  France,  1918. 
■^Journal  Officiel,  January  2,  1921. 


FRENCH    CURRENCY   AND   CREDIT  239 

commercial  activity  after  the  war  raised  loans  and  discounts  to 
levels  higher  than  before  the  war;  at  the  end  of  1920,  the  amount 
was  fr.  33 1 1  million.  The  Bank  of  France  in  the  crisis  before 
the  war  as  well  as  in  the  resumption  of  trade  after  the  war  con- 
tinued to  discount  commercial  bills  and  thus  enabled  banks  and 
private  individuals  to  meet  their  liabilities. 

(b)    The  Rates  of  Discount — 

The  rate  of  discount  of  the  Bank  of  France  changed  less  fre- 
quently than  did  that  of  the  Bank  of  England,  because  the  former 
is  less  sensitive  owing  to  its  larger  gold  reserve  with  respect  to 
liabilities,  and  owing  to  its  smaller  dealings  in  bills  and  to  less 
necessity  of  regulating  their  volume  by  a  varying  rate  of  discount. 
The  highest  rate  during  the  war  was  6  per  cent.  On  August  20, 
1 914,  it  was  reduced  to  5  per  cent,  at  which  level  it  remained 
unchanged  up  to  April  8,  1920,  when  it  was  raised  to  6  per  cent. 
About  the  same  time  the  rates  of  discount  of  the  Bank  of  England 
and  of  the  Federal  Reserve  banks  also  were  raised.  The  desire  to 
finance  the  transition  by  easy  money  kept  the  official  discount  rate 
low  until  the  spring  of  1920. 


V.  Moratorium  Bills 

As  commercial  discounts  declined  sharply  at  the  beginning  of 
the  war,  the  item  "moratorium  bills"  appeared — that  is,  bills 
matured  and  extended.  These  reached  a  high  level  of  fr.  4476 
million  in  October,  1914.^'^  As  moratorium  bills  declined  new 
commercial  bills  or  loans  and  discounts  rose.  The  moratorium 
bills  declined  from  their  high  level  and  on  December  31,  1914, 
amounted  to  fr.  3351  million,  on  December  30,  191 5,  to  fr.  1834 
million,  on  December  28,  1916,  to  fr.  1339  million,  on  December 
26,  1918,  to  fr.  1028  million,  on  December  26,  1919,  to  fr.  626 
million,  and  in  the  middle  of  1920  to  fr.  523  million,--  Against 
moratorium  bills  at  the  end  of  19 19  the  Bank  of  France  had 
securities  amounting  to  fr.  703  million,  a  sum  in  excess  of  its  lia- 
bility by  fr.  77  million. 

"Report  of  the  Bank  of  France,  1919;  also  Consul  General  Thackara's 
report,  p.  19. 

^  From  the  reports  of  the  Bank  of  France. 


240        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

This  continuous  decrease  in  the  moratorium  bills  is  an  indica- 
tion of  returning  financial  soundness.  The  cause  of  the  reduction 
was  the  policy  of  narrowing  the  extent  of  the  moratorium  from 
time  to  time,  as  noted  above.  The  reduction  in  1918  was  largely 
due  to  the  law  of  July  26,  191 8,  and  the  decree  of  December  29, 
191 8,  which  lifted  the  moratorium  for  beneficiaries  of  war  profits 
and  for  residents  in  the  interior  of  the  country,  who  had  been  able 
to  continue  agricultural  operations.  The  moratorium  was  lifted 
completely  after  January  i,  1921.-^ 

vi.  Notes  in   Circulation 

The  three  leading  belligerents  in  Europe  resorted  to  issues  of 
paper  money.  In  Great  Britain  the  government  itself  issued  cur- 
rency notes.  In  France  the  government  borrowed  of  the  Bank 
of  France  and  the  Bank  issued  paper  money.  In  Germany  the 
same  held  true  as  in  France  except  that  new  financial  institutions, 
the  loan  bureaus,  were  created,  and  under  the  law  their  notes 
were  made  the  equivalent  of  cash  or  gold  in  afiFording  a  basis  for 
the  issue  of  additional  Reichsbank  notes.  Only  technically  is  it 
true  that  in  France  the  government  did  not  resort  to  printing  of 
paper  money. 

(a)  Terms  of  Issue — 

The  notes  were  issued  upon  specie,  upon  statutory  and  com- 
mercial loans,  upon  advances  against  securities,  and  upon  advances 
to  the  state.  In  France  before  the  war  there  was  no  limitation  as 
in  England  that  the  notes  issued  should  represent  an  equivalent 
amount  of  gold.  Nor  did  the  French  system  require  as  in  Germany 
and  the  United  States  that  there  be  a  fixed  ratio  of  gold  and  com- 
mercial bills  to  notes.  This  freedom  of  note  issue  was  a  pillar  of 
strength  during  a  temporary  crisis  but  because  of  its  abuse  during 
the  war,  constituted  the  essential  weakness  of  the  post-war  credit 
and  currenq'  situation  in  France. 

(b)  Forms  of  Issue — 

In  preparedness  for  emergencies,  the  French  government  had 
accumulated  a  large  quantity  of  paper  money  in  advance.  This 
measure  recalls  those  that  Germany  took  in  anticipation  of  the 
struggle.     England  on  the  other  hand  was  so  thoroughly  unpre- 

**  Journal  Officiel,  December '30,  1920. 


FRENCH  CURRENCY  AND  CREDIT 


241 


pared  that  upon  the  suspension  of  specie  payment  there  was  a 
lack  of  paper  money,  and  postal  money  orders  were  made  to  pass 
from  hand  to  hand  like  notes.  In  addition  to  the  regular  large 
denomination  notes  of  the  Bank  of  France,  i -franc  and  50-centime 
notes  were  issued  by  the  chambers  of  commerce  upon  the  deposit 
of  an  equal  amount  of  Bank  of  France  notes.  Furthermore  the 
Bans  de  Defense  Nationale  in  denominations  of  5  francs  and  20 
francs  passed  from  hand  to  hand  like  currency  and  were  used  to 
pay  for  the  delivery  of  war  material.  In  the  loan  floated  in  the 
autumn  of  1920,  the  bearer  bonds  with  the  first  5  coupons  attached 
were  issued  in  a  size  identical  with  bank  notes. 


(c)    The  Continuous  Increase  in  Volume — 

During  the  Franco-Prussian  War  the  note  circulation  hardly 
doubled.  In  the  40  years  from  1872  to  191 1  the  note  circula- 
tion increased  from  fr.  3200  million  to  fr.  6800  million,  an  increase 
of  2.13  times.  In  5  years  of  the  World  War  the  note  circulation 
increased  6.03  times.  It  would  have  taken  120  years  to  attain  an 
equivalent  note  expansion  under  pre-war  conditions.  The  notes 
authorized  to  be  issued  were  as  follows:^* 


Date 

Million  francs 

Aug.  12,  1870 

1,800 

Aug.  14,  1870 

2,400 

Dec.  29,  1871 

2,800 

July,  15.  1872 

3,200 

Jan.  28,  1893 

4,000 

Nov.  17,  1897 

5,000 

Feb.  9,  1906 

S,8oo 

Dec.    1911 

6,800 

Aug.  5,  1914 

12,000 

May  11,  1915 

15,000 

Mar.  15,  1916 

18,000 

Feb.  15,  1917 

21,000 

Sept.  10,  1917 

24,000 

Feb.    1918 

27,000 

May  18,  1918 

30,000 

Sept.  18,  1918 

31,500 

Mar.    1919 

36,000 

May,   1919 

40,000 

Aug    1920 

43,000 

**  Econoraiste  Frangais,  May  24,  1919,  pp.  643-5.    Paris  correspondence 
London  Economist,  May  3,   1919.     Journal  Officiel,  Oct.   10,   1920. 


242        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  actual  issue  of  notes  shown  elsewhere  below  never  quite 
reached  the  maximum  amount  authorized.  The  maximum  out- 
standing was  39,644,392,000  francs  on  November  3,  1920. 

The  huge  increase  in  the  note  circulation  after  the  armistice 
was  due  to  the  fact  that  the  French  government  wished  to  finance 
the  transition  period  without  burdening  the  taxpayer  or  drawing 
too  heavily  on  the  investment  market.  As  a  result  of  the  con- 
tinuous increase  in  the  issues  of  banknotes  prices  rose  rapidly  and 
when  the  dangers  of  the  policy  of  easy  financing  became  apparent 
public  opinion  forced  the  Ministry  to  resort  to  taxation.  The 
restoration  of  the  devastated  areas  required  a  large  outlay  and  the 
simplest  way  to  get  it  was  to  water  the  circulation.  In  this  regard 
the  French  financial  policy  was  based  on  a  mistaken  notion.  The 
monetary  functions  of  the  state,  or  the  right  to  issue  notes,  were 
confused  with  the  fiscal  function,  or  the  power  to  raise  funds. 
This  was  true  not  only  in  France.  Whereas  France  relied  on  note 
issues.  Great  Britain  relied  on  ways  and  means  advances  from  the 
Bank  of  England  and  upon  the  issue  of  Currency  Notes. 

vii.  Minor  Operations  of  the  Bank  of  France 

Among  the  minor  operations  of  the  Bank  of  France  was  the 
reimbursement  to  business  houses  for  the  loss  of  credits  to  Russia. 
It  also  acted  as  agent  of  the  state  in  helping  to  float  the  loans. 
Of  the  fr.  30,000  million  of  the  loan  floated  in  191 8,  45  per  cent 
was  subscribed  through  the  Bank.  Furthermore,  in  the  mobiliza- 
tion of  securities  the  Bank  aided  in  the  transfer  to  the  French 
Treasury  of  the  French  holdings  of  bonds  of  neutral  countries. 
The  bonds  w^ere  received  in  all  the  branches  of  the  Bank  and  the 
amount  received  by  the  end  of  191 7  aggregated  774,140  securities 
with  a  par  value  of  about  fr,  640  million. ^^  The  Bank  was  largely 
instrumental  in  furnishing  exchange  at  fixed  rates  for  the  accom- 
modation of  the  commerce  of  the  country.  It  also  aided  the 
Treasury  in  controlling  the  exportation  of  capital  and  the  impor- 
tation of  securites. 

D.  The  Effects  of  Inflation 

The  effects  of  inflation  in  France  were  similar  to  those  experi- 
enced during  the  French  Revolution,  and  to  the  effects  in  other 

^Bank  of  France  report,  1917. 


FRENCH    CURRENCY   AND    CREDIT  243 

countries  during  the  World, War.  The  overissue  of  paper  money 
led  to  its  depreciation,  to  a  rise  in  prices,  and  an  increase  in  the  cost 
of  living  and  of  the  administration  of  the  governm.ent.  The  foreign 
exchanges  likewise  depreciated.  Government  credit  declined  both 
at  home  and  abroad.  As  the  purchasing  pov\'er  of  the  franc  de- 
clined, the  public  debt  rose,  increasing  rapidly.  Speculation  and 
profiteering  were  rife.  Legislation  fixing  prices  was  evaded.  As 
paper  depreciated  metallic  currency  rose  to  a  premium  and  when 
prohibitive  legislation  was  enacted,  specie  was  hoarded  or  melted. 
Paper  money  of  small  denominations  had  to  be  issued  to  replace  the 
vanished  currency.  To  reduce  the  need  for  currency  the  govern- 
ment and  private  bankers  attempted  to  popularize  the  use  of  checks. 
Inflation  was  reflected  in  the  private  banks  to  a  limited  extent. 

i.  The  Rise  in  Prices 

While  the  opponents  of  the  quantity  theory  of  money  affect  to 
see  other  causes  than  the  increase  in  the  notes  outstanding,  this 
factor  undoubtedly  was  the  chief  cause  of  the  rise  in  prices.  Im- 
portant factors,  other  than  the  increase  in  the  quantity  of  money 
were,  the  pressing  demand  of  the  government  for  goods,  the  dis- 
location of  labor,  the  occupation  of  the  coal  fields  and  of  the  in- 
dustrial regions  of  northern  France,  and  the  shortage  in  shipping. 
However  the  correspondence  in  the  several  countries  between  the 
increase  in  notes  outstanding  and  the  rise  in  prices  is  so  close,  as 
shown  in  tables  on  page  187  as  to  leave  no  doubt  as  to  the  prime 
cause  of  the  price  advance. 

The  table  of  prices  by  quarter  years  from  191 3  through  1918 
and  by  months  during  19 19  and  part  of  1920  shows  a  rapid  in- 
crease through  191 5,  a  moderate  increase  through  1 91 6,  again  a 
rapid  increase  through  191 7,  and  still  more  rapid  increase  through 
19 19  and  part  of  1920.  The  increase  of  prices  between  the  last 
quarters  of  successive  jears,  using  the  average  prices  from  July, 
191 3,  to  June,  1 91 4,  as  a  basis  of  lOO,  was  as  follows: 

1913-1914 8 

1914-191S SI 

1915-1916 41 

1916-1917 96 

1917-1918 63 

Jan.,  1919-Jan.,  1920 139 

Jan.,  1920-April.  1920 97 


244 


INTERNATIONAL   FINANCE  AND  ITS  REORGANIZATION 


The  following  table  shows  differences  between  wholesale  prices 
in  France  and  the  United  States  through  the  year  191 8: 


Index  Nttmbers  op  Wholesale  Prices  in  France  and  the  United  States, 
BY  Quarters  and  Years,  1913-1918*^ 


By  Quarters 

By  Years 

France* 

u.  s.t 

Differ- 
ence 

France 

U.S. 

Differ- 
ence 

France 

U.S. 

Differ- 
ence 

1913: 

1916: 

1913: 

lOI 

102 

—  I 

180 

118 

62 

100 

lOI 

—  I 

101 

100 

I 

191 

123 

68 

1914: 

ICX) 

lOI 

—  I 

187 

125 

62 

102 

99 

3 

99 

102 

-3 

199 

139 

60 

1915: 

1914: 

1917: 

140 

102 

38 

1CX> 

100 

0 

224 

152 

72 

1916: 

lOI 

97 

4 

258 

177 

81 

189 

126 

63 

lOI 

100 

I 

274 

187 

87 

1917: 

107 

98 

9 

295 

182 

113 

263 

17s 

88 

1915: 

1918: 

1918: 

I  25 

100 

25 

321 

187 

134 

339 

194 

145 

136 

100 

36 

334 

190 

144 

142 

102 

40 

348 

197 

151 

158 

107 

51 

3S8 

202 

156 

♦General  Statistical  Office. 

fPrice  section,  War  Industries  Board. 


*■  Mitchell,  Wesley  C,  International  Price  Comparisons,  Department  of 
Commerce,  Washington,  D.  C.,  1920. 


FRENCH    CURRENCY    AND    CREDIT 


245 


Subsequent  figures  of  prices  for  the  months  of  1 9 19  and  1920  arc 
given  herewith,  with  the  differences  between  the  prices  in  the 
United  States*  and  France,  and  also  slightly  different  figures,  from 
another  source,  for  the  years  191 3  to  1918.^^ 


COMPAR./iTrVE 

(Index  for 

Price  Indexes 
1913  =  100) 

Year 

U.S.* 

France  f 

DijEference 

1913 
1914 

191S 
1916 
1917 
1918 

1919: 

January 

April 

July 

October 

1920: 

January 

April 

July 

October 

December 

100 

lOO 
lOI 

124 

174 
197 

203 
203 

218 
223 

248 
265 

262 
225 

189 

100 

lOI 

137 
187 
262 
339 

348 
332 
349 
382 

487 
584 
496 
502 
434 

0 

I 
36 

63 

88 

142 

145 
129 

131 
159 

239 
319 
234 
277 
245 

*U.  S.  Bureau  of  Labor  Statistics. 
tBulletin  de  la  Statistique  Generale. 

In  view  of  the  fact  that  the  United  States  was  a  free  gold 
market,  except  during  the  period  of  the  gold  embargo  from  Oc- 
tober, 191 7,  through  May,  1919,  the  gap  between  prices  in  France 
and  in  the  United  States  is  a  true  measure  of  the  depreciation  of 
paper  in  France.  The  great  difference  which  became  evident  in 
1920  shows  the  full  effect  of  the  huge  volume  of  note  issues  put 
out  by  France.  The  difference  between  prices  in  the  United  States 
and  Great  Britain  is  far  smaller,  as  the  result  of  Britain's  prudent 
post-war  policy  in  issuing  notes.  The  circulation  of  the  notes  of 
the  Bank  of  France  by  approximately  quarter  years  is  given  here- 
with. The  parallelism  between  the  increases  in  notes  and  the  in- 
creases in  prices  is  evident. 

"  Federal  Reserve  Bulletin,  August,  1920,  and  February,  19*1, 


246        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


Notes  of  Bank  of  France  in  Circulation 
(in  million  francs) 


Date 

MUlion 

1 
Relative 

Date 

MUlion 

Relative 

francs 

figures 

francs 

figures 

1914 

1918 

July  30.... 

6,683 

100 

Mar.  28. . . 

25,179 

378 

June  27.  . . 

28,550 

423 

1915 

Sept.  26. . . 

29,922 

448 

Jan.   28 

10,474 

157 

Nov.  28. . . 

29,072 

435 

Mar.  25 

11,177 

168 

Dec.  26. . . 

30,250 

453 

June  24 

12,105 

181 

Sept.  30 

13,458 

202 

1919 

Nov.  25 ... . 

14,278 

214 

Mar.  27. . . 

33,372 

500 

Dec.  30. .  . . 

13,309 

199 

June  26. . . 

34,442 

515 

Sept.  25 . . . 

35,787 

536 

1916 

Dec.  26. . . 

37,274 

558 

Mar.  30 ...  . 

14,952 

224 

June  29 ... . 

15,806 

237 

1920 

Sept.  29. . . . 

16,714 

250 

Mar.  25. . . 

37,569 

563 

Nov.  30. .  . . 

16,119 

241 

June  24.  .  . 

37,544 

562 

Dec,  28.... 

16,679 

250 

Sept.  30. . . 

39,208 

588 

Dec.  31. . . 

37,902 

567 

1917 

Mar.  29 ... . 

18,460 

276 

June  28 

19,823 

297 

Sept.  27 

20,995 

315 

Dec.  26 ...  . 

22,337 

334 

ii.  Economic  Disturbances 

The  rise  in  prices  was  the  result  of  natural  law.  Nevertheless 
legislators,  ignoring  the  cause  of  the  difficulty,  attempted  to  cope 
with  it  by  regulating  prices  despite  the  fact  that  the  history  of  the 
currency  and  of  prices  in  the  French  Revolution  affords  abundant 
evidence  of  the  limitations  of  such  measures.  Prices  were  fixed  on 
some  commodities  and  as  a  result  capital  and  effort  were  shifted 
from  the  field  of  fixed  prices  into  that  of  free  prices.  When  the 
price  of  wheat  was  fixed,  farmers  planted  oats.  Or  they  sold  oats 
for  a  profit  and  fed  wheat  to  their  stock.  Subsequently  when  a 
law  was  passed  prohibiting  the  feeding  of  wheat  to  animals,  other 
means  of  evading  the  price  legislation  were  devised.  Farmers  then 
held  back  and  refused  to  sell  or  they  bartered  their  produce  for 
commodities.  Profiteering  in  commodities  was  widespread  and  the 
benefits  did  not  flow  to  the  government  in  taxes  as  in  Great  Britain 
and  the  United  States  where  stringent  excess-profit  taxes  were 


FRENCH    CURRENCY   AND    CREDIT  247 

enacted  and  administered.  Speculation  Increased  as  a  result  of  the 
rise  in  prices.  Stocks  rose  in  proportion  to  the  decline  of  the  pur- 
chasing power  of  the  franc.  Bondholders  found  their  incomes  de- 
clining in  purchasing  power.  The  whole  gamut  of  historic  economic 
disturbances  were  repeated. 


iii.  Depreciatioji  of  Foreign  Exchange 

The  effect  of  inflation  on  foreign  exchange  will  be  treated  in  a 
separate  section.  It  is  suflliclent  to  note  here  that  the  exchange 
rate  of  the  franc  abroad  declined  in  the  free  gold  markets  part 
passu  with  the  depreciation  of  the  notes  at  home.  That  francs  did 
not  so  decline  in  Great  Britain  or  in  the  United  States  during  the 
period  of  our  belligerency  was  due  to  the  artificial  support  of 
French  exchange  in  the  London  and  New  York  markets  respec- 
tively. The  reason  for  the  depreciation  is  evident.  As  an  incon- 
vertible note  depreciates  in  terms  of  gold  at  home  so  an  incon- 
vertible bill  of  exchange  depreciates  internationally.  When  gold 
quotations  were  published  in  1920,  the  depreciation  of  foreign  ex- 
change in  dollars  corresponded  closely  to  the  discount  on  paper. 
The  absence  of  gold  as  a  corrective,  or  the  removal  of  the  gold 
shipping  points  which  limited  fluctuations,  made  depreciation  on 
the  international  markets  inevitable. 

Just  as  the  attempt  to  maintain  a  depreciated  franc  at  par  in- 
ternally worked  hardship  on  certain  classes  and  led  to  evasion,  so 
the  attempt  to  hold  a  depreciated  franc  at  par  internationally  led 
to  hardship  and  injustice.  In  the  competitive  international  market 
for  commodities,  the  franc  fell  to  its  natural  level.  But  in  the 
monopolistic  market  for  cable  services  the  government  regarded 
the  franc  as  the  equivalent  of  its  pre-war  value  in  gold.  As  a 
result,  the  Western  Union  Telegraph  Company  refused  to  accept 
messages  out  of  France  for  the  United  States  unless  paid  on  the 
gold  basis.  The  French  government,  however,  claimed  that  the 
depreciated  paper  franc  was  legal  tender  and  had  to  be  accepted 
at  its  mint  parity.  The  Western  Union  Telegraph  Company  did 
internationally  what  the  French  farmer  did  internally,  namely,  re- 
fused to  sell  at  fixed  prices  in  depreciated  paper.-^ 

"New  York  Times,  December  10,  1920. 


248        INTERNATIONAL   FINANCE   AND    ITS    REORGANIZATION 

iv.  Premium  on  Specie 

The  inevitable  result  of  the  excessive  issue  of  notes  was  the 
appearance  of  a  premium  on  specie.  Originally,  gold  and  silver 
were  traded  in  illegally  and  sub  rosa  in  much  the  same  way  as  gold 
was  speculated  in  frankly  and  legally  in  the  Gold  Room  after  the 
Civil  War.  When  speculation  was  detected,  legal  penalties  were 
imposed.  Cases  of  detection  were  unusual,  however.  The  law- 
abiding  Frenchman,  however,  was  able  to  invent  means  of  cir- 
cumventing the  law.  Instead  of  exchanging  his  specie  for  notes  at 
a  premium,  he  melted  the  coin  and  sold  the  gold.  Then  a  new  law 
was  passed  which  prohibited  the  melting,  recoinage  or  withdrawal 
from  circulation  of  metallic  money,  under  penalty  of  a  fine  of  5000 
francs  and  imprisonment  up  to  six  months.  The  legislation  pro- 
hibiting the  hoarding  of  gold  and  requiring  its  surrender  for  notes 
led  to  some  absurd  situations.  For  instance,  American  paper  money 
had  a  higher  value  than  American  gold  money  in  France,  because 
the  law  required  gold  to  be  surrendered.  The  difference  was  about 
3.86  cents  on  the  dollar.'^  The  depreciation  in  paper  was  com- 
plicated further  by  the  rise  in  the  price  of  silver  and  silver  was 
bought  up  illegally  at  1.5  times  its  face  value  and  was  hoarded. 
New  metallic  coins  put  out  by  the  mint  vanished  upon  issue. 

However,  in  1920  quotations  for  gold  were  published. 
They  measured  the  depreciation  in  terms  of  paper  money  as  truly 
as  the  foreign  exchange  rates  in  terms  of  dollars.  A  kilogram  of 
find  gold  is  worth  3437  francs  at  parity,  but  it  was  quoted  at  11, 200 
francs  per  kilogram  on  May  5,  1920,  or  3.26  times  parity  and  at 
7,800  francs  on  July  21,  or  2.37  times  parity.^"  Dollar  exchange 
at  Paris  and  prices  of  gold  moved  in  close  sympathy. 

v.  Shortage  of  Specie  and  Demonetization 

As  a  result  of  the  influences  mentioned  there  was  a  shortage  of 
small  change.  Not  only  were  gold  and  silver  scarce  but  copper 
and  nickel  as  well.  When  the  copper  sous  disappeared  in  191 7  the 
government  put  out   15  million  nickel  coins  in  replacement  but 

"'From  Governor  Harding's  testimony  before  the  Senate  Committee 
on  Banking  and  Currency  in  its  hearings  on  the  Federal  Reserve  Foreign 
Bank  Bill.     Federal  Resen'e  Bulletin,  August,  1918,  p.  726. 

*"  Statistiques  Centrales,  ix:  iv,  July,  1920,  p.  331,  and  x:  i,  October, 
1930,  p.  38. 


FRENCH  CURRENCY  Am)   CREDIT  249 

these  disappeared  shortly  after  their  issue.  Restaurants  in  Paris 
posted  notices  that  customers  would  either  have  to  bring  their  own 
change  or  accept  postage  stamps.  To  relieve  the  shortage  the  gov- 
ernment decided  in  the  autumn  of  19 1 7  to  demonetize  certain  coins, 
declaring  them  no  longer  current  and  calling  for  their  surrender. 

vl.  Issue  of  Paper  Money  of  Small  Denominations 

As  gold  and  silver  disappeared  from  circulation  in  the  early  part 
of  the  war  the  local  chambers  of  commerce  issued  notes  of  i  franc 
and  y^  franc  to  replace  the  small  change  which  disappeared.  These 
notes  were  secured  by  notes  of  the  Bank  of  France  of  a  larger 
denomination.  In  the  course  of  circulation  these  notes  would  be 
returned  to  the  issuing  authority  by  the  Bank  of  France.  The 
Paris  Chamber  of  Commerce  issued  fr.  15  million  in  denominations 
of  2-franc,  i -franc  and  50-centime  notes,  which  were  put  out  at  the 
rate  of  fr.  200,000  per  day  during  the  summer  of  1920.  Again, 
the  smaller  denominations  of  treasury  bills,  tons  de  la  defense 
nationale,  were  used  as  currency  and  passed  from  hand  to  hand  like 
notes.  This  device  is  strikingly  similar  to  the  use  of  interest-bear- 
ing mandat  of  the  French  Revolution  or  our  Continental  cur- 
rency.^^    Apparently  the  lessons  of  history  are  of  no  avail. 

The  small  denomination  bonds  of  the  loan  floated  in  October, 
1920,  were  identical  in  size  with  banknotes  and  were  intended  to 
pass  as  currency  while  accumulating  interest  to  the  holder.  They 
had  five  interest  coupons  attached.  In  this  respect  they  were  similar 
to  an  issue  during  the  Civil  War.  The  difficulty  we  experienced 
was  that  the  notes  were  very  scarce  at  the  time  that  the  accrued 
interest  made  it  worth  while  for  investors  to  hoard  them,  and  be- 
came abundant  immediately  after  the  payment  of  interest.  The 
result  was  an  embarrassing  alternation  of  expansion  and  contraction 
of  the  currency.'^  The  extensive  use  of  paper  money  wore  it  out 
very  rapidly  and  token  money  made  of  an  alloy  was  substituted  in 
the  spring  of  1920.  This  had  a  metallic  ring  but  was  not  of  suffi- 
cient value  to  melt  or  smuggle  out  of  the  country  or  even  to  hoard. 
The  distinctive  feature  of  the  new  coins  was  that  they  were  more 
durable  than  paper.     They  were  also  issued  by  the  chambers  of 

*"  White,  Horace,  Money  and  Banking,  pp.  134  and  158. 
For  illustrations  of  emergency  coinage  and  notes  see  Benjamin  White, 
Currency  of  the  Great  War.    London:  Waterlow  and  Sons,  Ltd.:  1931. 
*"  White,  Horace,  ibid.,  p.  158. 


250         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

commerce  and  were  secured  by  equivalent  amounts  of  Bank  of 
France  notes. 

vii.  The  Disruption  of  the  Latin  Monetary  Union^^ 

The  Latin  Monetary  Union  was  an  attempt  to  unify  the  mone- 
tary systems  of  several  countries  and  it  accomplished  this  purpose 
effectively  before  the  war.  In  addition  it  diminished  the  slight 
fluctuations  of  exchange  rates  because  the  currencies  of  the  countries 
in  the  union  circulated  interchangeably.  However  the  war  upset 
the  basis  of  the  union.  The  similarity  between  the  French  franc 
and  the  Swiss  franc  became  one  of  name  only.  Because  of  the 
depreciation  of  the  French  franc  Switzerland  was  flooded  with 
depreciated  French  coins.  The  result  was  a  surplus  of  currency 
in  Switzerland  and  a  shortage  in  France,  which  in  part  accounts 
for  the  measures  described  above.  To  overcome  this  difl^iculty  the 
Convention  of  1885  of  the  Latin  IV'Ionetary  Union  was  revised 
with  the  object  of  withdrawing  the  depreciated  French  coins  from 
Switzerland.  The  revised  terms  of  the  Convention  are  given 
herewith  r* 

Article  i.  The  French  and  Swiss  governments  shall  each  withdraw 
from  circulation  on  their  respective  territories  all  silver  coins  of  the 
other  country  of  the  value  of  two  francs,  one  franc,  fifty  centimes,  and 
twenty  centimes. 

Article  2.  Such  coins  are  to  be  no  longer  received  in  public  payment 
when  three  months  have  elapsed  from  the  entry  into  force  of  the  con- 
vention. 

Article  3.  The  coins  so  withdrawn  from  circulation  are  to  be  put  at 
the  disposal  of  the  state  of  their  origin. 

Article  4.  Switzerland  is  to  be  given  the  right  of  increasing  the  con- 
tingent of  small  silver  coin  per  head  of  its  population  from  sixteen  to 
twenty-eight  francs. 

Article  5.  Switzerland  may  reserve  the  quantitj-  of  French  coin  she 
judges  indispensable  for  her  own  needs  from  the  amount  by  which  the 
French  coin  in  Switzerland  exceeds  the  amount  of  Swiss  coin  in  France; 
Switzerland  may  centralize  the  coin  so  reserved  and  use  it  as  a  guarantee 
for  an  equivalent  amount  of  two-franc,  one-franc,  and  fifty-centime  notes, 
which  she  is  entitled  to  issue  on  it.  Unless  arrangements  to  the  con- 
trary are  made  in  the  meanwhile  all  French  coin  reserved  by  Switzerland 

"  Lansburgh,  A.,  Der  Lateinische  Miinzbund,  Die  Bank,  June,  1920, 
PP-  343-363.  See  also  Willis,  H.  Parker.  Genesis  of  Latin  Monetary 
Union,  Chicago,  1901,  and  History  of  Latin  Monetary  Union,  Chicago, 
1901. 

"Report  of  the  British  Minister  to  Switzerland,  Board  of  Trade 
Journal,  June  lo,  1920,  and  August  12,  1920. 


FRENCH    CURRENCY    AND    CREDIT  251 

is  to  be  placed  at  the  disposal  of  the  French  government  four  years  after 
the  entry  into  force  of  the  convention.     ... 

Article  8.  Switzerland  is  to  inform  France  of  the  quantities  of  coin 
eventually  reminted.  For  such  excess  of  French  money  as  France  imme- 
diately receives  from  Switzerland,  France  undertakes  to  repay  Switzer- 
land, as  also  for  such  centralized  French  money  as  Switzerland  may  re- 
turn her  at  the  end  of  four  years.  Repayment  may  be  affected  at 
France's  choice  either  in  the  coins  of  the  Latin  Union,  preferably  Swiss, 
or  in  gold  coin  of  ten  francs  and  upwards,  or  in  bills  on  Switzerland. 

Article  9.  Each  government  is  to  bear  the  cost  of  collecting  and  re- 
storing the  coin  of  the  other  government. 

Article  11.  So  long  as  each  country  refuses  to  accept  the  coin  of  the 
other  in  public  payment,  each  country  may  also  interdict  the  importation 
of  the  other's  coin. 

Article  14.  The  governments  of  the  contracting  countries  agree  to 
take  measures  to  prevent  the  clandestine  melting-up  of  coin  emanating 
from  countries  belonging  to  the  Union. 

French  silver  coins  in  the  denominations  of  2  francs,  I  franc 
and  50  centimes  have  accordingly  been  withdrawn  from  circulation 
in  Switzerland  with  the  concurrence  of  France.  During  September, 
1920,  French  paper  was  depreciated  58  per  cent  in  Switzerland; 
consequently  silver  coins  were  smuggled  from  France  into  Switzer- 
land in  spite  of  the  maintenance  of  guards  on  the  Franco-Swiss 
frontier.  Under  the  agreement  the  federal  treasury  in  Berne  acted 
as  the  receiving  and  assaying  station  for  the  French  coins.  Over 
fr.  16  million  were  returned  to  France  within  60  days,  and  in  the 
transactions  at  the  Swiss  Federal  Mint  the  quantity  of  silver  turned 
in  was  three  times  the  amount  of  silver  coins  asked  for  in  exchange, 
a  fact  which  indicates  the  redundance  of  silver.  France  settled  for 
the  French  coins  repatriated  by  means  of  bank  drafts  in  Swiss 
francs.  The  time  limit  on  the  exchange  of  coins  was  September 
30,  1920,  and  holders  after  that  date  had  to  stand  the  loss.  Judg- 
ing from  the  fate  of  the  Latin  Monetary  Union,  the  proposals  for 
a  world  currency  after  the  war  seem  futile. 

viii.  Popularization  of  Checks 

It  is  an  error  to  assume  that  excessive  note  issues  lead  to  in- 
flation any  more  than  excessive  bank  credits.  The  condition  of  the 
Bank  of  France  would  not  be  greatly  affected  if  the  liabilities  were 
shifted,  if  deposits  were  increased  and  notes  correspondingly  de- 
creased. The  attempt  to  popularize  the  use  of  checks  in  France 
resulted  from  a  mistaken  notion  that  the  rise  in  prices  was  due  to 
the  circulation  of  paper.     Deposit  banking  has  the  advantage  that 


252        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  ph3'sical  difficulties  are  less  when  inflation  is  produced  by  de- 
posits than  by  checks. 

The  attempt  to  develop  deposit  accounts  and  payments  by  check 
dates  back  to  1859  when  the  Credit  Industrie!  et  Commercial  was 
established.  Other  companies  were  founded  later,  as  the  Societe 
Generale  and  the  Credit  Lyonnais.  However,  the  association  of 
monetary  value  with  physical  tokens  was  so  deep-rooted  in  the 
minds  of  the  French  public  that  the  attempts  were  not  successful. 
The  Chambre  de  Compensation,  the  leading  clearing  house  estab- 
lished in  1872,  fell  into  disuse,  particularly  because  of  the  system 
of  credit  transfers  through  the  Bank  of  France.  The  desire  to 
dispense  with  the  huge  amount  of  currency  and  small  change  that 
became  necessary  as  the  result  of  inflation  during  the  war  led  to  a 
revival  of  the  clearing-house  scheme,  and  a  Caisse  de  Compensa- 
tion formed  in  July,  1 91 7,  for  the  use  of  the  British  and  American 
banks,  was  merged  in  a  new  Chambre  de  Compensation,  an  organ- 
ization with  a  larger  membership.  It  has  been  unsuccessful  in 
overcoming  the  preference  of  the  French  public  for  notes  and  its 
prejudice  against  payment  by  check.^** 

ix.  Private  Banks  Affected 

A  few  of  the  distinctive  features  of  the  French  banking  system 
have  some  bearing  on  a  study  of  the  effects  of  the  war  on  the 
French  private  banks.  Because  the  French  relied  on  notes  rather 
than  on  deposits  as  a  means  of  transacting  business,  the  huge  in- 
flation in  France  did  not  result  in  an  increase  of  the  deposit  credits 
of  the  private  banks,  as  in  Germany  and  Great  Britain.  The 
private  banks  were  over-cautious  in  extending  credit  to  their  cus- 
tomers, and  as  a  result  the  funds  for  war  had  to  come  from  notes 
of  the  Bank  of  France  and  from  short-term  treasury  bills.  Had 
the  banks  adopted  a  more  liberal  commercial  policy  during  the 
war,  particularly  in  view  of  the  availability  of  rediscounting  facili- 
ties at  the  bank  of  France,  the  financing  of  the  war  would  have 
been  easier.  As  a  result  of  this  imprudently  conservative  policy  in 
granting  credit,  acceptance  liabilities  declined.  The  balance  sheets 
of  the  private  banks  show  that  they  did  not  support  French  com- 
merce and  industry  during  the  war.  In  fact,  the  availability  of  re- 
munerative government  paper  probably  accounted  for  the  reluctance 

***Economiste  Fran^ais,  Ixviii:  i,  pp.  75,  203,  329,  491,  649,  779. 


FRENCH   CURRENCY   AND   CREDIT 


253 


of  the  private  banks  to  buy  commercial  paper.  Treasury  bills  were 
liquid  assets,  because  the  Bank  of  France  would  rediscount  them 
or  else  make  loans  against  them  as  security.  The  item  "bills  dis- 
counted," included  short-term  government  securities  as  well  as  com- 
mercial bills,  as  in  the  case  of  the  German  private  banks.  The 
following  are  the  principal  items  as  of  December  31  of  each  year, 
from  the  consolidated  statements  of  the  three  largest  banks,  the 
Credit  Lyonnais,  the  Comptoir  National  d'Escompte  de  Paris,  and 
the  Societe  Generale  pour  Favoriser  le  Developpement  du  Com- 
merce et  de  rindustrie  en  France  r^ 


PEiNcrpAL  Items   of   CoNSOLroATED   Statements   of  the  Three   Large 
Banks  of  France 

(in  million  francs) 


Assets 


1913 


1916 


1917 


1918 


1919 


Cash  in  vaults  and  balance  at  banks . . . 

Bills  discounted  and  short-term  national 
defense  securities 

Debits  in  current  account 

Advances  on  securities,  including  stock  ex- 
change loans 

Securities,  including  rentes 

Financial  participations 

Forward  exchange  operations 


3494 
1464 

io=;8 
63 
75 


1209 
1309 


920 
69 
73 


999 


1912 
1035 


2S3I 

lOII 


636 


61 
178 


1256 

3804 
1190 

632 
81 
57 


859 

4636 
1528 


79 

55 

208 


1064 

8299 
2581 

746 
82 
55 

227 


Total  (including  items  omitted  above) 

LlABHITIES 

Capital  paid  in 

Reserve 

Credits  in  current  account 

Deposits  (checking  accounts,  deposit  certifi- 
cates payable  at  sight,  discount  a/c). . .  . 

Deposits  payable  at  fixed  date 

Acceptance  liabilities 


700 

329 

3067 

2071 
297 
493 


700 
343 
2213 

1355 
320 
150 


700 

334 
2074 

1336 

304 
114 


1660 
299 


700 

269 

3576 

2192 
285 
92 


8373 


700 

269 

3918 

2579 

280 

54 


Total  (including  items  omitted  above) 


5934 


13,651 


700 

29s 

7288 

4167 
30J 
172 


8373     13,651 


A  few  of  the  outstanding  features  of  this  statement  reflect  the 
efiEects  of  the  war.  Cash  in  vault  increased  as  a  result  of  inflation. 
Commercial  bills  and  treasury  bills  declined  greatly  in  191 4  and 
did  not  regain  their  pre-war  level  until  1917.  In  1918  and  1919 
this  item  increased,  particularly  as  a  result  of  the  resumption  of 
commercial  activity  and  also  because  of  the  extensive  issue  of  short- 
term  treasury  bills  after  the  armistice,  when  long-term  loans  could 
not  be  floated.  Advances  on  securities  declined  and  did  not  regain 
the  pre-war  level.  Apparently  less  business  was  done  in  this  field. 
Securities,  including  rentes,  naturally  rose  in  volume,  as  a  result  of 

"Federal  Reserve  Bulletin,  October,  1920. 


254        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  issue  of  war  loans.  Profits  from  underwriting  declined  during 
the  war,  because  of  the  restriction  on  capital  issues.  Forward  ex- 
change operations,  which  reflected  the  activity  of  the  Bank  of  France 
in  supporting  the  exchange  market,  showed  a  large  and  continuous 
growth  throughout  the  war.  Debits  in  current  account  declined 
during  the  war  but  regained  the  pre-war  level  at  the  end  of  1918. 
Credits  in  current  account,  as  well  as  demand  deposits,  declined  in 
1914,  regained  their  pre-war  level  by  the  end  of  1917,  and  grew 
continuously  thereafter.  At  the  end  of  1919  the  effects  of  the  in- 
dustrial revival  were  evident.  Both  these  items  had  risen  to  double 
their  pre-war  level.  Acceptance  liabilities  greatly  declined,  prob- 
ably in  connection  with  the  reduced  volume  of  private  trade  of 
France.  Time  deposits,  a  small  item,  remained  practically  stationary 
throughout  the  war. 

These  conclusions  are  more  obvious  in  the  following  table  of 
relative  figures  for  the  important  items: 

RELATrvE  Figures  of  Important  Items  of  the  CoNSormATED  Statements 
OF  Three  Large  Banks  of  France 


Assets 

Cash  in  vaults  and  balance  at  banks 

Bills  discounted  and  short-term  national 
defense  securities 

Debits  in  current  account 

Advances  on  securities,  including  stock  ex- 
change loans 

Total 

Lli^bilities 

Credits  in  current  account 

Deposits  (checking  accounts,  deposit  certifi- 
cates payable  at  sight,  discount  a/c) .... 

Deposits  payable  at  fixed  date 

Acceptance  liabilities 


1913 

I9I4 

191S 

1916 

1917 

1918 

100 

256 

212 

218 

266 

183 

100 
100 

11 

SS 
71 

72 
69 

109 
81 

133 

104 

100 

87 

64 

60 

60 

SS 

100 

73 

73 

84 

106 

119 

100 

72 

68 

79 

117 

128 

100 
100 
100 

66 
108 
30 

6S 

103 

23 

80 

lOI 

18 

106 
96 
19 

I2S 

94 
II 

I9I9 


226 

238 
76 


193 


238 

203 
102 
3S 


E.  The  Outlook 

The  outlook  in  France  depends  upon  the  ability  of  the  Bank 
of  France  to  reduce  its  note  circulation  and  to  eliminate  from 
among  its  assets  the  large  advances  on  government  account  and  on 
account  of  its  allies.  As  in  our  Civil  War  period  there  are  two 
parties,  one  of  which  hopes  to  "stabilize"  the  currency  at  its  present 
value;  the  other  party  expects  to  reduce  the  currency  either  by  a 
slow  process  of  annual  amortization  out  of  taxes  or  else  rapidly 
out  of  large  loans. 


FRENCH   CURRENCY   AND   CREDIT  255 

i.  The  Expansion  of  Production  to  Absorb  the  Increased  Currency 

In  the  43  years  from  the  end  of  the  Franco-Prussian  War  to 
the  beginning  of  the  World  War,  the  maximum  note  issues  author- 
ized increased  about  twofold.  In  the  five  jears  since  the  outbreak 
of  the  war  the  currency  increased  over  sixfold.  If  the  outstanding 
circulation  at  the  end  of  the  war  is  to  be  maintained,  it  will  require 
at  least  100  years  at  the  pre-war  rate  of  progress  for  production  to 
increase  sufficiently  to  require  the  present  currency.  The  reduc- 
tion of  inflation  by  building  up  assets  in  back  of  the  token  of 
value  will  be  a  very  long  process.  The  rate  of  progress  for  several 
years  after  the  war  will  certainly  not  be  equal  to  that  in  the 
decade  or  two  prior  to  the  war.  At  best  the  whole  period  will  be 
one  of  inconvertible  paper,  which  implies  wide  fluctuations  of  ex- 
change, the  unsettlement  of  trade  and  the  absence  of  sensitive 
regulation  of  trade,  such  as  is  possible  when  gold  flows  freely. 

During  the  Franco-Prussian  War,  the  advances  to  the  state 
amounted  to  fr.  1 470  million,  a  mere  bagatelle  against  the  fr. 
26,600  million  maximum  outstanding  at  the  end  of  1920.  And 
yet  it  took  7^  years,  until  January  I,  1878,  to  resume  specie  pay- 
ment. If  it  required  7^/^  years  to  resume  specie  payment  when  ad- 
vances to  the  state  amounted  to  only  fr.  1470  million,  assuming  the 
same  rate  of  progress  it  would  require  over  130  years  to  get  rid  of 
the  inflation  resulting  from  fr.  26,600  million  in  advances  to  the 
state. 

ii.  Deflation  of  the  Currency 

The  deflation  of  the  currency  is  the  more  advisable  course. 
This  may  be  accomplished  either  by  means  of  annual  payments  out 
of  an  amortization  fund,  or  out  of  loans.  M.  Maurice  Casenave 
estimated  that  fr.  2  billion  a  year  would  be  available  for  the  re- 
duction of  the  advances  to  the  state  and  therefore  that  the  in- 
flated circulation  could  be  reduced  to  its  pre-war  basis  in  about  I2 
years.^^ 

However,  M.  Casenave's  estimate  seem  to  be  too  high.  The 
date  of  retirement  of  the  first  annual  amount  was  postponed  for  a 
year  from  January  i,  1921.     In  the  autumn  of  1920,  the  annual 

"Casenave,  Maurice,  The  French  Situation.  Proc.  Acad.  Pol.  Sci.,  ix- 
1,  p.  104.  June,  1920. 


256        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

sum  available  for  amortization  of  the  debt  of  the  state  to  the  Bank 
was  estimated  at  fr.  300  million.  To  reduce  the  paper  currency, 
amounting  to  fr.  39,000  million,  to  its  pre-war  level  would  require 
over  100  years  if  the  same  rate  of  amortization  were  maintained. 
Apparently  amortization  by  means  of  annual  payments  of  in- 
terest on  the  note  issue  by  the  state  will  not  deflate  the  currency 
as  rapidly  as  is  desirable.  It  is  therefore  necessary  that  long-term 
loans  be  utilized  for  this  purpose.  The  French  government  ex- 
pects to  retire  2,ooo  million  francs  annually.  The  success  of  this 
policy  rests  on  many  factors,  the  rate  of  rebuilding  of  the  de- 
vastated areas  and  the  balancing  of  the  budget.  These  two  factors 
are  closely  related  because  a  large  section  of  the  budget  is  offset 
by  a  credit  called,  "Expenses  recoverable  from  Germany  under 
the  Treaty  of  Peace."  Whether  this  section  of  the  budget  is  to 
be  balanced  depends  on  Germany's  recovery,  which  in  turn  is  con- 
tingent on  the  removal  of  the  obstacles  to  the  restoration  of  normal 
conditions  in  Germany.  In  this  task  France  has  the  power  of  de- 
cision and  the  responsibility  therefor. 

iii.  Analogy  of  the  Civil  War 

M.  Casenave,  in  the  address,  quoted  above,  compared  France 
after  the  World  War  with  the  United  States  after  the  Civil  War. 
There  are  a  few  interesting  statistics  that  w^ill  make  clear  the 
differences.  In  1865  the  debt  of  the  United  States  was  $2681 
million  and  the  note  circulation  was  $715  million.^^ 

With  a»population  of  30  millions  the  per  capita  debt  was  about 
$90  and  the  per  capita  note  circulation  about  $24.  The  period  of 
inconvertible  paper  was  14  years,  resumption  of  specie  payment 
taking  place  in  1879.  In  the  middle  of  1920  France  had  a  debt  of 
fr.  233,000  millions  and  a  note  circulation  of  about  fr.  39,000 
million.  Or  taking  francs  at  par  the  national  debt  of  France  was 
46,600  million  dollars  and  the  note  circulation  was  the  equivalent 
of  8000  million  dollars.  With  a  population  of  40  millions  the  per 
capita  debt  was  the  equivalent  of  $1165,  or  13  times  the  per  capita 
debt  in  the  United  States  after  the  Civil  War,  and  the  note  circula- 
tion was  the  equivalent  of  $200  per  capita  or  about  8  times  the 
United  States  figure  after  the  Civil  War.    Assuming  the  rate  of 

"Mitchell,  Sound  Currency,  vol.  iv,  No.  8,  Hepburn,  Histon'  of  the 
Currency  in  the  United  States,  p.  204. 


FRENCH    CUIOIENCY    AND    CREDIT  257 

progress  of  the  United  States  after  the  Civil  War,  it  would  take 
France  from  112  to  182  years  to  resume  specie  payments,  depend- 
ing on  whether  notes  in  circulation  or  public  debt  is  taken  as  a 
basis  of  calculation. 


iv.  Possible  Remedy 

This  conclusion  is  manifestly  absurd.  Many  of  the  calculations 
with  respect  to  the  war  itself  failed  to  take  into  account  non- 
mathematical  factors.  It  may  be  that  for  France  the  ultimate 
solution  would  be  a  forced  conversion  and  reduction  of  the  rate 
of  interest  on  the  debt,  a  re-valuation  of  the  franc,  and  the  adoption 
of  the  gold-exchange  standard,  under  which  international  gold 
settlements  would  be  effected  but  not  internal  gold  settlements. 
The  arguments  for  this  proposal  are  many.  The  injustice  and  the 
evils  of  inflation  are  a  matter  of  the  past.  The  harm  is  done.  To 
attempt  to  deflate  would  be  a  proposal  to  enrich  the  speculators, 
both  native  and  alien,  by  means  of  taxes  paid  by  Frenchmen.  This 
tax  must  necessarily  fall  on  the  masses  because  the  taxation  of 
wealth  dries  up  the  sources  of  capital  and  retards  industrial  develop- 
ment. Deflation  therefore  involves  a  second  grave  injustice.  To 
revalue  the  franc  near  its  current  gold  quotation  and  to  start  with 
a  clean  slate  involves  no  greater  injustice  and  may  mean  the  resur- 
rection of  the  nation  from  the  ashes  of  war. 


CHAPTER  VIII 
GERMAN  CURRENCY  AND  CREDIT 

A.  History  of  the  Reichsbank 

i.  Development  of  the  Central  Bank 

A  brief  history  of  the  development  of  the  Reichsbank  ^  is 
helpful  in  understanding  the  war-time  developments  in  German 
currency  and  credit.  The  Reichsbank  is  an  outgrowth  of  the  Bank 
of  Prussia  and  has  practically  a  monopoly  of  the  right  to  issue 
notes,  except  that  the  privilege  is  still  retained  by  four  private 
banks.  The  Bank  of  Prussia  was  founded  in  1765  as  a  state  institu- 
tion. Even  after  it  subsequently  became  a  partly  private  institution 
in  1846,  the  control  was  vested  in  a  Kuratorium,  composed  of 
representatives  of  the  king.  Originally,  the  Bank  of  Prussia  was 
primarily  a  bank  of  issue,  only  later  becoming  a  bank  of  dis- 
count and  deposit.  A  precedent  for  the  Darlehnskassen,  the  loan 
bureaus,  established  during  the  World  War,  is  afforded  by  the 
practice  of  the  Bank  of  Prussia,  subsequently  retained  by  the 
Reichsbank,  of  advancing  money  on  commodities  and  on  bullion 
and  pledged  securities  at  conservative  valuations  and  for  limited 
periods.  The  law  of  1846  provided  for,  but  fixed  a  limit  upon  the 
issue  of  notes,  but  this  latter  provision  was  thereafter  repealed 
and  the  traditional  banking  ratio  of  one  to  three  between  the 
metallic  reserve  and  the  note  circulation  governed  the  note  issue. 
At  the  time  of  the  establishment  of  the  Reichsbank  in  1875,  there 
were  in  the  several  German  states  thirty-three  other  banks  of  issue, 
many  of  which  were  born  of  the  fiscal  needs  of  their  governments. 
To  promote  trade  among  the  German  states  and  with  foreign 
countries  the  currency  was  unified.    The  payment  of  the  indemnity 

'  Conant,  Chap.  viii. 

Lansburgh,  Alfred,  Die  Deutsche  Bank,  1870  bis  1920.  Die  Bank,  pp. 
259-366. 

258 


GERJVIAN    CURRENCY   AND    CREDIT  259 

by  France  enabled  Germany  to  adopt  the  gold  standard.  The 
mark  was  made  the  monetary  unit,  although  German  economists 
had  recommended  the  five-franc  piece  adopted  at  the  International 
Monetary  Conference  at  Paris  in  1867.  Silver  coins,  which  had 
previously  been  legal  tender,  became  token  money,  with  limited 
legal  tender  privileges,  except  for  the  silver  thaler  until  its  demon- 
etization in  1902. 

ii.  Organization  and  Function  of  the  Reichsbank 

As  a  result  of  Prussian  and  imperial  legislation  and  of  a  con- 
vention between  Prussia  and  the  empire,  the  Royal  Bank  of 
Prussia  ceased  to  function  at  the  end  of  1875  and  transferred  its 
rights  and  privileges  to  the  newly  formed  Reichsbank,  which, 
though  privately  owned,  is  under  government  direction.  The  bank 
is  controlled  by  a  council  of  curators,  of  which  the  president  is 
the  Imperial  Chancellor  and  the  members  are  named  by  the  emperor 
and  the  Bundesrat.  In  the  absence  of  the  chancellor  another 
official  of  the  empire  acts.  The  council  of  curators  holds  quarterly 
meetings.  The  administration  of  the  Reichsbank  is  vested  in  the 
directorate,  nominated  by  the  imperial  government.  The  stock- 
holders have  an  advisory  board  of  fifteen  members,  elected  from 
among  their  number,  one-third  being  chosen  annually.  They  hold 
monthly  meetings  and  advise  on  policies  affecting  the  rate  of  dis- 
count and  like  matters.  An  executive  committee  of  three  has  daily 
supervision  of  the  bank's  affairs. 

Unlike  the  Bank  of  England,  the  Reichsbank  has  not  a  fixed 
fiduciary  circulation,  but  against  outstanding  notes  one-third  of 
the  amount  must  be  in  cash.  A  limited  amount,  Kontingent,  may 
be  issued  without  cover,  and  above  this  limit  notes  are  under  a 
tax  or  penalty,  which  hastens  their  retirement.  Like  the  Bank 
of  England,  the  circulation  of  the  Reichsbank  may  be  increased 
upon  the  surrender  of  the  privilege  of  issue  by  any  of  the  other 
issuing  banks.  The  Reichsbank  may  expand  its  note  circulation 
in  time  of  need  without  furnishing  metallic  cover,  by  paying  a 
tax  weekly  at  the  rate  of  5  per  cent  per  annum.  This  tax  makes 
possible  the  expansion  of  the  circulation  in  a  crisis,  but  promptly 
retires  it  when  the  discount  rate  falls.  The  charter  of  the  Reichs- 
bank expired  at  the  end  of  1 920  and  the  new  law  extending  the 
charter    gave   the   bank   wider    powers    in    dealing   with    foreign 


26o         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

exchange  and  provided  for  larger  government  participation  in  the 
profits  of  the  bank.* 

iii.  Control  and  Concentration  of  Gold  Supply 

To  centralize  its  gold  reser%'es  and  to  increase  its  control  over 
the  movement  of  gold,  the  Reichsbank  developed  several  devices. 
To  avoid  the  exportation  of  gold  during  the  period  of  high  exchange 
rates,  the  bank  would  buy  foreign  bills  vi^hen  exchange  was  cheap 
and  would  resell  them  when  exchange  rose  sufficiently  to  produce 
an  outflow  of  gold.  Again,  gold  imports  were  encouraged  by 
exempting  advances  upon  them  from  interest  charges  for  a  limited 
period.  To  meet  the  demand  for  currency  for  quarterly  settlement 
in  business,  the  issue  of  uncovered  notes,  free  from  taxes,  was  in- 
creased during  the  last  weeks  of  each  quarter  of  the  year  and  thus 
lessened  the  demand  for  gold  coin.  To  economize  in  the  use  of 
gold  the  Reichsbank  encouraged  the  development  of  the  system  of 
Giro  Verkehr,  whereby  deposits  at  any  branch  of  the  Reichsbank 
were  transferred  without  charge  to  a  branch  in  another  town. 
This  is  analogous  to  the  check  and  clearing  system  in  the  United 
States.  The  Reichsbank  also  adopted  the  customary  practice  of 
maintaining  a  high  discount  rate  to  attract  gold.  The  central  gold 
reserve  was  built  up  shortly  before  the  war  by  substituting  notes  of 
small  denominations  for  specie  and  by  bidding  high  for  gold  in  the 
world  market. 

B.  War  Legislation,  Policy  and  Expedients' 

i.  Suspension  of  Specie  Payment 

Upon  the  outbreak  of  the  war  specie  payment  was  suspended. 
To  centralize  the  gold  of  the  country  in  the  Reichsbank  notes  of 
50  and  20  marks  were  issued  under  the  law  of  1906,  prior  to 
which  date  the  lowest  denomination  was  lOO  marks.  Finally  mk. 
120  million  of  silver  token  money  was  authorized  to  be  coined, 

'Report  of  the  Reichsbank  for  the  year  1919. 

Liesse,  Andre.  Le  Renouvellement  du  Privilege  de  la  Reichsbank. 
Economiste  Frangais,  January  31,  1920,  pp.  3-5. 

*Bendix,  Ludwig,  Germanj's  Financial  Nlobilization. 

Quarterly  Journal  of  Economics,  xxix,  pp.  728,  et  seq.,  August,  1915. 

Going,  Chase  M.,  German  War  Finance.  Journal  of  Political 
Economy,  xxiv,  pp.  513-547,  June,  1916. 


GERMAN   CURRENCY  AISTD  CREDIT  26 1 

to  replace  gold  in  circulation.  Reichsbank  notes  were  no  longer 
redeemable  in  gold.  The  Imperial  Treasury  was  released  from 
the  requirement  to  redeem  subsidiary  coins  in  gold,  but  was  per- 
mitted to  exchange  them  for  irredeemable  Reichsbank  notes  and 
Imperial  Treasury  notes.  The  Treasury  likewise  was  released 
from  the  obligation  to  redeem  its  own  outstanding  notes.  To 
protect  the  gold  reserves  of  the  private  note-issuing  banks,  they 
were  allowed  to  redeem  their  notes  with  Reichsbank  notes.  Thus 
all  currency  became  inconvertible. 

ii.  Imperial   Treasury   Notes  Issued 

Furthermore,  to  provide  notes  of  small  denominations,  govern- 
ment paper  money,  Reichskassenscheine,  was  issued  in  denomina- 
tions of  5  and  10  marks.  As  a  result  of  legislation,  the  war  chest 
of  mk.  120  million  was  doubled  by  the  sale  of  Imperial  Treasury 
Notes,  Reichskassenscheine,  for  gold.  These  were  made  legal 
tender  and  their  acceptance  made  compulsory.  The  original  mk. 
120  million  were  authorized  April  30,  1874,  another  120  million  on 
July  3,  1913,  and  an  additional  120  million  on  March  22,  1915, 
the  last  being  fully  covered  by  gold  or  loan-bureau  notes.  Like 
the  British  currency  notes,  their  object  was  to  provide  bills  of 
small  denomination. 

iii.  Increased  Issue  of  Reichsbank  Notes 

The  policy  of  German  war  finance  was  to  raise  large  sums  of 
money  through  the  Reichsbank.  Under  the  terms  of  the  banking 
law  notes  were  issued  against  cash  and  bills  of  exchange  in  the 
proportion  of  one-third  and  two-thirds.  The  war  policy  required 
an  increase  of  bank  notes  and  to  meet  the  need,  new  definitions 
of  cover  were  made.  Before  the  war,  cash  consisted  of  gold, 
silver,  and  a  limited  amount  of  Imperial  Treasury  notes.  To 
create  "cash"  the  Imperial  Treasury  note  issue  was  increased  and 
the  notes  of  the  loan  bureaus,  Darlehnskassenscheine,  were  author- 
ized as  equivalent  to  cash.  To  meet  the  demand  for  bills  of 
exchange  as  cover  for  notes,  the  bank  law  of  March,  1875,  which 
required  discounted  bills  of  exchange  maturing  in  three  months 
and  bearing  two  responsible  names  as  guarantors,  was  modified 


262         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

by  the  law  of  August  4,  19 14,  which  provided  that  in  lieu  of 
commercial  bills,  which  would  be  available  in  diminishing  volume 
during  the  war,  the  Reichsbank  should  regard  as  bills  of  exchange 
treasury  bills,  bearing  the  signatures  of  two  members  of  the 
National  Debt  office  and  maturing  within  three  months.  In  brief, 
for  gold  and  for  commercial  bills  as  cover  for  notes,  there  were 
substituted  respectively  notes  of  the  loan  bureaus  and  short-term 
treasury  bills.  Inflation  might  thus  be  unlimited.  The  Reichs- 
bank was  also  authorized  to  buy,  sell  and  discount  three-months 
treasury  bills. 

The  same  act  likewise  repealed  for  the  period  of  the  war  the 
provision  for  a  tax  of  five  per  cent  per  annum  upon  the  uncovered 
amount  of  circulating  notes  above  the  legal  amount,  Kontingent. 
However,  the  facility  in  creating  cash  reserves  by  issuing  loan- 
bureau  notes  made  this  provision  almost  superfluous.* 

iv.  New  Institutions  to  Create  Credit 

Several  types  of  credit  institutions  were  created  for  the  purpose 
of  liquefying  or  mobilizing  the  financial  resources  of  the  country. 
The  Reichsbank  aided  the  larger  firms  and  the  banks.  The  loan 
bureaus,  Darlehnskassen,  aided  the  smaller  tradesmen  or  the 
individuals  who  possessed  any  values  that  might  be  pledged.  Muni- 
cipal loan  bureaus  were  established  to  make  loans  on  securities 
unacceptable  at  the  regular  loan  bureaus.  The  rates  of  interest 
were  higher  and  a  guaranty  fund  was  raised  by  cooperative 
societies  and  the  local  community.  These  institutions  did  not 
issue  notes,  but  expanded  their  activities  by  rediscounting  at  the 
Reichsbank  and  the  Kriegskredit  banks.  The  Kriegskredit  banks 
were  organized  by  banks,  chambers  of  commerce  and  public  bodies. 
These  institutions  made  loans  based  on  unsecured  notes  and  on 
goods  or  bills  of  exchange,  which  in  turn  were  rediscounted  at  the 
Reichsbank.    The  Kriegskredit  banks  could  not  issue  notes. 

The  Darlehnskassen  were  the  outgrowth  of  the  practice  of 
the  old  Bank  of  Prussia  and  of  the  Lombard  department  of  the 
Reichsbank  (Par.  3,  Sec.  13  of  Bank  Act),  of  making  loans  on 
commodities  or  on  securities.  The  loan  bureaus  themselves  were 
actually  tried  out  in  Prussia  as  separate  institutions  during  three 

'Laws  No.  4333,  4434,  4435,  4446,  4448,  of  the  Rcichgesetzblatt. 


GERMAN  CURRENCY  AND  CREDIT  263 

wars,  In  1848,  in  1866,  and  in  1870.  Similar  institutions  were 
established  in  France  in  1830  and  1848  but  they  had  not.  the 
privilege  of  issuing  notes.  The  loan  bureaus  were  under  the  con- 
trol of  the  Reichsbank.  Except  in  rare  cases,  loans  were  made  for 
not  less  than  1 00  marks  in  amount  and  for  not  more  than  three 
months  in  time.  The  security  might  be  either  non-perishable 
merchandise  stored  within  Germany  on  which  a  loan  of  50  per 
cent  was  allowed,  securities  issued  by  the  empire  or  by  a  federal 
state,  or  securities  conforming  to  specified  requirements  and  issued 
by  corporations  within  the  empire,  on  which  loans  of  from  60  to 
75  per  cent  were  made.  According  to  the  law,  the  rate  of  interest 
was  not  to  be  higher  than  the  Reichsbank  rate  for  bills.  The 
loan  bureau  had  the  right  to  sell  the  security  and  reimburse  itself 
out  of  the  proceeds.  The  loan  was  made  in  the  form  of  loan- 
bureau  notes,  Darlehnskassenscheine,  which  were  issued  in  denomi- 
nations of  I  mark  and  upward.  They  were  counted  as  cash  in  the 
reserves  of  the  Reichsbank  like  gold  and  imperial  treasury  notes. 
Unlike  the  currency  notes  of  Great  Britain  or  the  Bank  of  France 
notes,  there  was  no  gold  cover  in  back  of  the  German  loan-bureau 
notes.  However,  if  the  security  should  be  inadequate  to  pay  the 
loan  when  due,  the  loan  bureau  had  recourse  to  all  the  assets  of 
the  borrower. 


V,  Moratorium 

The  liquefaction  of  the  fixed  assets  of  Germany  made  li 
unnecessary  to  declare  an  official  moratorium.  However,  there  19 
little  difference  between  declaring  a  moratorium  when  liquid  assets 
are  not  available  and  liquefying  fixed  assets  to  avoid  a  moratorium. 
England  and  France  followed  the  former  policy  and  Germany  the 
latter.  A  moratorium  postpones  payment  directly ;  the  loan  bureau 
postpones  ultimate  payment  indirectly  and  causes  great  inflation 
in  addition.  A  modified  moratorium  was  put  into  effect  on  bills 
and  checks  falling  due  after  July  31,  191 4,  which  was  extended 
until  June  30,  191 5.  The  courts,  however,  were  authorized,  as 
in  Great  Britain,  to  extend  the  time  for  payment  if  the  inability 
to  pay  was  due  to  the  war  and  if  the  delay  did  not  inflict  undue 
hardship  on  the  creditor.  As  in  Great  Britain  the  courts  could 
stay  judgment,   in   the  case  of   failure   to   pay  rent,   interest  or 


264        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

mortgages.     These  legal  processes  were  made  less  costly  and  less 
involved  than  the  usual  court  proceedings.* 


C.  Operations  of  the  Reichsbank  During  the  War' 

The  effect  of  the  financial  legislation  enacted  at  the  beginning 
of  the  vv^ar  was  soon  reflected  in  the  statements  of  the  Reichsbank. 
Gold  and  the  metallic  reserves  increased  fairly  continuously  up  to 
the  middle  of  19 17,  fluctuated  slightly,  reached  a  high  level  in 
the  autumn  of  1918,  and  declined  sharply  after  the  armistice.  The 
paper-money  holdings  of  the  Reichsbank  increased  slightly  up  to 
19 1 9  and  very  rapidly  thereafter.  Government  paper,  that  is 
treasury  bills  discounted  at  the  Reichsbank,  were  included  with 
commercial  bills  in  the  weekly  statement  shortly  after  the  out- 
break of  the  war,  and  the  combined  account  increased  continuously 
during  the  war  and  by  very  large  amounts  after  the  armistice. 
Before  the  outbreak  of  the  war  the  Reichsbank  notes  were  based 
on  gold  and  commercial  bills  but  since  then  have  been  based  on 
Darlehnskassenscheine  and  treasury  bills.  Naturally  with  the 
increase  of  treasury  bills  and  of  the  loan-bureau  notes  which  were 
turned  in  to  the  Reichsbank,  its  own  notes  increased  correspond- 
ingly. The  increase  was  particularly  rapid  after  the  armistice. 
Corresponding  to  the  Increased  holdings  of  treasury  bills  amon^! 
the  assets  of  the  Reichsbank,  deposit  liabilities  increased  at  a  very 
rapid  rate  after  the  armistice. 

The  important  items  in  the  balance  sheet  of  the  Reichsbank 
are  as  follows:'' 

"Going,  p.  525. 

Mayer,  Adolph,  Zur  Geschichte  und  Theorie  des  Moratoriums. 
Schmollers  Jahrbuch,  1916,  xxxix,  pp.  1789-1856. 

'  Verwaltungsbericht  der  Reichsbank,  1914-1920.  Berlin:  Reichs- 
druckerei. 

Statistiches  Jahrbuch,  section  viii.  Geld  und  Kreditwesen,  gives 
cumulative  summary  of  operations. 

'  Paper  by  Bendix,  Ludwig,  Commissioner  of  Foreign  Exchange  of  the 
Ministry  of  Commerce,  The  Reichsbank  from  the  Outbreak  of  the  War 
to  June  30,  1920.  A  study  submitted  by  Frederick  Simpich  of  the  American 
Mission  at  Berlin,  July  15,  1920. 

Also,  Raffalovich,  M.  A.,  Le  Reichsbank  en  1918  et  1919.  Economiste 
Francais,  June  21,  1919,  pp.  77i.  ^'  ^^1' 

Also,  Monthly  statements  in  Die  Bank,  Berlin. 


GER&IAN   CURRENCY   AND   CREDIT 


26s 


Statement  of  the  Reichsbank 
(in  million  marks) 


Date 

Gold 

Paper 

money* 

Commercial 

bills, 

checks, 

treasury 

biUs 

Bank 

notes 

in 

circulation 

Deposits 

1914: 

January        7 . . . . 

1204 

81 

1,168 

2,303 

804 

June           30 ... . 

1306 

60 

1,213 

2,407 

858 

July           23 

1357 

105 

751 

1,891 

944 

July            31 

1253 

45 

2,081 

2,909 

1,258 

December  31 ...  . 

2093 

880 

3,937 

5,046 

1,757 

1915: 

June           30 ... . 

2388 

514 

4,918 

5,840 

1,799 

December  31 ... . 

2445 

1,291 

5,803 

6,918 

2,359 

1916: 

June           30 

2466 

634 

6,610 

7,241 

2,371 

December  31.  .  . . 

2520 

423 

9,610 

8,055 

4,564 

1917: 

June           30 ... . 

2457 

452 

10,962 

8,699 

5,693 

December  31 ... . 

2407 

1,315 

14,598 

11,468 

8,050 

1918: 

June           30 

2346 

1,787 

16,671 

12,510 

9,181 

November    7 .  .  . . 

2550 

3,190 

19,444 

16,959 

9,326 

December  31 ...  . 

2262 

5,270 

27,416 

22,188 

13,280 

1919: 

June           30 ...  . 

1116 

9,062 

33,293 

29,968 

13,730 

December  31 ... . 

1089 

11,027 

41,745 

35,698 

17,072 

1920: 

March        31 ... . 

1091 

13,974 

44,576 

45,170 

18,498 

June           30 • •  ■  • 

1092 

17,254 

50,954 

53,975 

23,414 

December  31.... 

1092 

23,417 

60,634 

68,806 

22,327 

♦Reichskassenscheine — total  issue  mk.  360  million,  of  which  30  millions 
on  the  average  are  kept  by  the  Reichsbank. 

Darlehnskassenscheine  and  banknotes  of  four  note  banks  (Sachsische 
Bank,  Badensche  Bank,  Wurtembergische  Bank,  Bayerische  Notenbank)  — 
total  issue  about  250  millions,  of  which  in  recent  years  only  3  millions  on 
an  average  were  kept  by  the  Reichsbank. 


266        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


GERMAN   CURRENCY  AND   CREDIT 


267 


268        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  changes  in  the  important  items  of  the  balance  sheet  of 
the  Reichsbank  become  more  evident  in  the  following  table  show- 
ing the  relative  figures,  taking  the  figures  for  December  31,  191 3, 
as  100.^ 


Relative  Figures  of  Principal  Items  of  Reichsbank  Statement 


Items 


Dec. 
31. 

1913 

July 
31. 
1914 

Dec. 
31. 

1914 

Dec. 

31, 
191S 

Dec. 
31, 
1916 

Dec. 

31. 
1917 

Dec. 

31. 
1918 

Aug. 
IS. 
1919 

100 

106 

147 

171 

175 

179 

158 

78 

100 

72 

1900 

2780 

910 

2.830 

11,400 

i8,6oo 

100 

140 

264 

389 

64s 

978 

1,840 

2,020 

100 

112 

195 

.67 

311 

442 

856 

1. 103 

June 
30, 
1920 


Total  metallic  reserve 

Imperial  treasury  and  loan 
bank  notes 

Bills,  checks  and  discounted 
treasury  bills 

Reichsbank  notes  in  circula- 
tion  


76 
37.400 

3.420 
2,080 


Compared  with  the  figures  at  the  end  of  191 3,  the  total 
metallic  reserve  at  the  end  of  1917  rose  1.79  times  as  high  as 
at  the  end  of  1913,  but  by  the  middle  of  1920  it  had  declined  to 
0.76  times  the  191 3  figure.  On  the  other  hand  imperial  treasury 
and  loan  bank  notes  by  1920  rose  to  374.0  times  as  high,  a  colossal 
increase.  The  item  "bills,  checks  and  discounted  treasury  bills," 
consisting  chiefly  of  the  latter,  was  34.20  times  as  great  on  June 
30,  1920,  as  at  the  end  of  1913.  The  Reichsbank  notes  increased 
20.80  times. 

The  extent  to  which  government  paper  displaced  gold  and 
commercial  bills  as  assets  of  the  Reichsbank  may  be  seen  in  a 
comparison  of  the  ratios  of  the  several  items  to  the  total  assets 
at  the  specified  dates  from  the  end  of  191 3  to  the  middle  of  1920. 
The  percentage  of  metallic  reserve  to  total  assets  declined  from 
38.8  per  cent  at  the  end  of  191 3  to  1.3  per  cent  in  the  middle  of 
1920.  On  the  other  hand  imperial  treasury  and  loan  bank  notes 
rose  from  1.2  per  cent  at  the  end  of  191 3  to  21.2  per  cent  of  total 
assets  in  the  middle  of  1920.  The  percentage  of  bills,  checks  and 
discounted  treasury  bills  rose  from  40.0  per  cent  at  the  end  of 
1913  to  71.9  per  cent  of  total  assets  in  the  middle  of  1919  and 
62.5  per  cent  in  the  middle  of  1920.  The  increase  was  in  dis- 
counted treasury  bills  primarily. 

'BaseH  or  the  Reichsbank  returns  compiled  by  the  Federal  Reser\'e 
Board  from  Die  Bank,  the  Deutscher  Oekonomist,  and  the  Berliner 
Boersen-Courier.  Federal  Reserve  Bulletin,  October,  1919,  and  August, 
1920. 


GERilAN   CURRENCY   AND   CREDIT 


209 


Percentage 

OF  Total  Assets 

Items 

Dec. 
31. 
1913 

July 
31. 
1914 

Dec 

31. 
1914 

Dec. 
31, 
1915 

Dec. 
31. 
1916 

Dec. 

31. 
1917 

Dec. 

1918 

Aug. 
IS, 
1919 

Jun« 

30. 
1920 

38.8 
1.2 

40.0 

Si-7 

34-2 
0.7 

46. S 
52.6 

29.4 
12. 1 

54.5 
42.1 

2S.O 
130 

ss.s 
35.9 

18.9 
3-1 

71-5 
31.5 

12. 5 
6.3 

70. S 

22.6 

6.1 
14.0 

80.0 
10 -3 

2.7 

20.5 

71.9 
3.9 

Treasury  and  loan  bank  notes 
Bills,  checks  and  discounted 

21 .2 
62. s 

Ratio    metallic    reserve    to 
notes,   in  circulation,   per 
cent 

2.0 

With  the  metallic  reserve  increasing  slightly  through  19 18 
and  declining  sharply  thereafter,  on  the  one  hand,  and  on  the 
other  hand  with  rapidly  increasing  note  liabilities,  the  ratio  of 
metallic  reserve  to  notes  declined  from  51.7  per  cent  at  the  end 
of  1913  to  2.0  per  cent  in  the  middle  of  1920.  If  deposit  liabilities 
be  included  the  ratio  of  metallic  reserve  to  note  and  deposit 
liabilities  combined  fell  from  45.2  per  cent  on  June  30  of  191 3  to 
1.4  per  cent  on  June  30,  1920.  Although  the  loan  bureau  notes 
are  not  part  of  the  liabilities  of  the  Reichsbank  they  should  be 
included  among  the  liabilities,  so  as  to  present  a  true  picture  of 
the  credit  situation  in  Germany,  in  which  event  the  ratio  declines 
to  1.2  per  cent. 

Percentage  of  Metal  to  Liabilities 


Item 

1913 

1914 

1915 

1916 

1917 

1918 

1919 

1920 

Ratio  metallic  reserves  to  notes  and 
deposit  liabilities  combined,  as  of 
June  30  each  year 

45.2 

49-9 

31-9 

26.0 

17-5 

II. 4 

2.6 

1.4 

i.   Gold  Policy  of  the  Reichsbank 

(a)    Changes  in  Gold  Holdings  During  the  War — 

Before  the  war  the  gold  in  Germany  was  estimated  at  from 
mk.  380a  million  to  mk,  4400  million,  of  which  the  Reichsbank 
held  about  mk.  1357  million  on  July  23,  1914.  The  remaining 
amount  was  in  circulation.  The  war  fund,  amounting  to  about 
mk.  205  million,  was  transferred  by  the  government  to  the  Reichs- 
bank at  the  beginning  of  the  war.  The  gold  holdings  increased 
up  to  May,  19 17,  and  declined  slightly  as  a  result  of  gold  exports 
from  Germany  to  pay  for  food  and  to  maintain  German  credit 
in  the  neighboring  neutral  countries.  Limited  quantities  were 
released  to  the  German  jewelry  trade  for  export  and  under  the 


270        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

restriction  that  the  value  of  the  finished  article  be  greatly  in 
excess  of  the  raw  gold  used.  On  October  15,  1918,  the  gold 
holdings  of  the  Reichsbank  rose  to  a  maximum  of  mk.  2,662,929,- 
000,  as  a  result  of  incorporating  in  the  statement  the  Russian  gold 
received  under  the  treaty  of  Brest-Litovsk.  Since  the  beginning 
of  the  war,  therefore,  the  stock  of  gold  at  the  Reichsbank  increased 
about  mk.  1305  million,  net. 

After  the  armistice  the  gold  holdiiigs  declined  very  rapidly, 
owing  to  payment  for  food  supplies  and  to  settlement  of  the  terms 
of  the  armistice.  Article  19  of  this  document  provided  for  the 
restitution  by  Germany  of  Russian  and  Roumanian  gold.  This 
gold  was  to  be  delivered  in  trust  to  the  Allies  and  held  by  them 
subject  to  terms  of  the  treaty.  Furthermore,  cash  taken  from  the 
National  Bank  of  Belgium,  as  well  as  other  specie  and  documents, 
had  to  be  returned.  By  June  30,  1920,  the  Reichsbank  had  lost 
mk.  1600  million,  of  which  mk.  312,740,000,  taken  from  Soviet 
Russia,  was  transferred  to  Paris.^ 

(b)    War  Measures  to  Increase  Gold  Holdings — 

To  maintain  as  high  a  ratio  of  gold  to  note  and  deposit  liabili- 
ties as  possible,  the  government  engaged  in  a  propaganda  and 
enacted  legislation  to  increase  the  gold  supply.  Shortly  after  the 
outbreak  of  the  war  German  paper  had  fallen  to  a  discount  in 
the  neighboring  neutral  countries.  On  November  23,  1914,  the 
Bundesrat  penalized  the  buying  and  selling  of  gold  at  a  premium 
over  paper,  prohibited  the  exportation  of  gold  under  the  penalty 
of  fine  and  imprisonment,  forbade  the  publication  of  rates  of 
foreign  exchange,  and  required  holders  of  safe  deposit  vaults  to 
sign  -a  statement  that  they  did  not  hoard  gold. 

Again,  travelers  were  stopped  at  the  frontiers  and  gold  on 
their  person  was  exchanged  for  notes.  Privileges  were  extended 
to  soldiers  for  collecting  gold.  The  wealthy  were  required  to 
swear  that  they  possessed  no  further  gold.  The  clergy  preached 
and  the  newspapers  made  appeals  to  the  public.  Committees 
were  formed  in  the  towns  to  collect  gold  ornaments  which  were 
exchanged  for  notes  and  which  were  melted  down.^°     In  exchange 

'Commerce  Reports,  July  8,  1919. 

"Address  of  Sir  Edward  Holden  to  the  stockholders  of  the  London 
City  and  Midland  Bank,  January  26,  1917.  See  The  StaMst,  January 
27,  1917. 


GERMAN   CURRENCY   AND   CREDIT  27 1 

for  art  objects  surrendered,  the  Reichsbank  offered  engraved  copies 
of  the  painting  of  Arthur  Kaempf  entitled,  "I  gave  gold  for  iron — 
national  sacrifice,  1813-"  German  women  w^ere  asked  to  turn 
in  their  pearls  in  exchange  for  notes. 

The  value  of  these  measures  to  increase  the  gold  supply  is 
doubtful.  The  amount  of  gold  collected  exceeded  the  requirements 
of  trade.  More  gold  was  in  the  Reichsbank  than  under  the  pre- 
war system  of  convertible  paper.  The  accumulation  of  gold  as  a 
reserve  for  a  vast  increase  of  inconvertible  notes  does  strengthen 
however,  the  probability  of  redemption  of  notes. 

ii.   Commercial  Bills  and  Discounted   Treasury   Bills 

Before  the  war  the  Reichsbank's  holding  of  treasury  bills  was 
kept  separate  from  the  holdings  of  commercial  bills.  Discounted 
treasury  bills  averaged  about  mk.  400  million  from  the  beginning 
of  19 1 4  to  the  outbreak  of  the  war.  In  the  last  week  of  July, 
1 91 4,  when  war  loomed  up  as  a  probability,  discounting  of  com- 
mercial bills  increased  suddenly.  After  the  outbreak  of  the  war 
the  commercial  bills  and  treasury  bills  were  merged  on  the  Reichs- 
bank statements,  but  the  item  consisted  chiefly  of  government  paper. 
Bendix  estimates  that  commercial  bills  declined  from  mk.  2081  mil- 
lion in  the  last  week  of  July,  191 4,  to  less  than  mk.  500  million  at 
the  end  of  19 18  and  rose  again  to  about  mk.  3000  million  by  the 
end  of  June,    1920. 

(a)   Intermittent  Increases  up  to  the  Armistice — 

The  total  volume  of  discounts  and  advances,  or  commercial 
bills  and  discounted  treasury  bills  combined,  fluctuated  regularly 
around  the  end  of  March  and  the  end  of  September  of  each  year 
from  the  autumn  of  1 914  to  the  autumn  of  191 8,  as  shown  in  the 
table  on  page  272. 

The  increase  from  about  mk.  5000  million  on  August  31,  1 91 4, 
to  about  mk.  24,000  million  in  September,  191 8,  was  intermittent. 
Discounts  and  advances  increased  just  before  the  war  loans  were 
floated  in  March  and  September  of  each  year,  but  declined  after 
the  loans  to  a  slightly  lower  level.  These  fluctuations  were  due  to 
borrowing  by  the  government  in  anticipation  of  the  loans.  Upon 
receipt  of  funds  from  the  sale  of  bonds,  the  government  redeemed 
its  short-term  obligations  held  by  the  Reichsbank,  causing  a  marked 


272        INTERNATIONAL   FINANCE    AND    ITS    REORGANIZATION 


decline  in  this  item  on  the  balance  sheet  of  the  bank.  However, 
as  the  war  continued,  there  was  a  decline  in  the  percentage  and 
amount  repaid  of  the  treasury  bills  held  by  the  Reichsbank;  for 
instance,  the  decline  in  the  spring  of  191 8  was  only  mk.  2146 
million  as  compared  with  mk.  4991  million  in  the  spring  of 
1917. 

Discounts  and  Advances 
(in  million  marks) 


Date 

Million  marks 

Date 

Million  marks 

1914: 

1918: 

June           30 

1,285 

]SIarch        30 ... . 

16,034 

July        31 

2,283 

April           30 ...  . 

13,888 

August       31 

4,85s 

September  30 ...  . 

23,830 

September  30 

4,786 

October      31 ...  • 

20,679 

October      31 

2,809 

1919: 

1915: 

^March        31 ...  - 

30,187 

March        31 

6,877 

April           30 ...  . 

31,553 

April           30 

3,807 

September  30 ... . 

33,859 

September  30 

7,484 

October      31 ... . 

34,016 

October      30 

4,225 

1920: 

1916: 

March        31 ...  . 

44,576 

March        31 

8,124         1 

June            30 

50,954 

April          29 

5,138 

September  15. . . . 

49,720 

September  30 

10,769 

October      31 

7,891 

191 7: 

March        31 

13,606 

April          30 

8,715 

September  29 

15,633 

October      23 

11,553 

(b)    Great  Increases  After  the  Armistice — 

After  the  armistice  the  increase  was  no  longer  intermittent; 
it  was  continuous.  From  November,  1918,  until  June,  1920,  the 
floating  debt  of  the  Empire  rose  from  mk.  45,000  million  to  mk. 
117,000  million,  and  the  Reichsbank  holdings  of  commercial  bills 
and  treasury  bills  in  the  same  period  rose  from  mk.  21,000  million 
to  about  mk.  51,000  million.  This  huge  increase  in  i^  years 
is  in  striking  contrast  to  the  increase  in  the  previous  four  years, 
from  about  mk.  5000  million  on  August  31,  1914,  to  mk.  21,000 
million  on  October   31,   191 8.     The   former  increase  was  twice 


GERMAN   CURRENCY  AND   CREDIT  273 

as  great  as  the  latter.  The  reason  for  this  continuous  increase 
in  the  floating  debt  and  in  the  correspondingly  continuous  increase 
in  the  Reichsbank  holdings  of  treasury  bills  and  of  commercial 
bills  was  that  German  government  credit  had  broken  down  and 
it  was  therefore  impossible  to  float  a  long-time  loan,  which  would 
partly  refund  the  floating  debt.  Then  again  after  the  armistice 
the  neutral  governments  refused  to  extend  even  short-term  credit 
to  Germany.  The  expenses  of  demobilization  were  met  by  means 
of  treasurj^  bills,  and  these  were  not  entirely  sold  to  the  public 
but  in  large  part  discounted  at  the  Reichsbank.  In  other  words, 
the  Reichsbank  carried  the  floating  debt  of  Germany  after  the 
armistice.^^ 

iii.  Note  Issues 

(a)   Increases  by  Years — 

The  Reichsbank  notes  in  circulation  increased  continuously  after 
the  beginning  of  the  war,  except  to  the  extent  that  there  was  a 
very  slight  decline  during  the  periods  of  subscriptions  to  loans. 
The  notes  in  circulation  on  July  31,  19 14,  amounted  to  mk.  2909 
million,  and  after  a  fairly  continuous  rise  amounted  on  October 
31,  1918,  to  mk.  16,661  million,  an  increase  of  about  mk.  i3iOOO 
million. 

The  increase  of  notes  before  the  armistice  was  due  to  the 
flooding  of  the  invaded  territories  with  German  marks.  For 
instance,  in  191 7  the  ruble  in  Poland  was  superseded  by  the  Polish 
mark,  which  was  made  the  equivalent  of  the  German  mark  and 
which  bore  the  guaranty  of  the  German  government  of  conversion 
into  German  marks.  In  addition  to  her  own  notes  Germany 
guaranteed  the  redemption  of  mk.  760  million  of  Loan  Office  notes 
circulated  by  the  Loan  Office  of  the  East,  as  well  as  mk.  800 
million  of  Polish  Loan  Office  notes  and  mk.  400  million  of  notes 
issued  in  the  Ukraine  as  well  as  the  mark  notes  issued  in  the 
French  and  Belgian  territories  invaded.  The  Belgian  mark  notes 
amounting  to  mk.  5500  million  were  refunded  by  German  bonds 
payable  in  20  years  and  bearing  5  per  cent  interest  beginning 
May,  1921.^2 

"The  1918  report  of  the  Reichsbank.  See  also  Federal  Reserve  Bul- 
letin, May,  1919. 

^"  Commerce  Reports,  February  2,  1920. 


274 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


Owing  to  the  inability  to  raise  funds  through  loans  after  the 
armistice,  notes  in  circulation  rose  by  leaps  and  bounds  to  a  level 
of  mk.  53,975  million  on  June  30,  1920,  an  increase  in  that  time 
of  mk.  37,000  million.  The  rate  of  increase  during  1915  was 
about  37  per  cent;  during  1916,  17  per  cent;  during  1917,  42  per 
cent;  during  1918,  106  per  cent;  during  1919,  61  per  cent  and 
during  the  first  half  of  1920  51  per  cent.  The  increase  after  June, 
1920,  was  at  a  growing  rate,  the  increase  during  July  and  August 
being  about  mk.  5000  million.  The  total  notes  of  all  kinds  in 
circulation  on  August  31,  1920,  amounted  to  mk.  72,000  million, 
of  which  mk.  58,000  million  v/ere  Reichsbank  notes.  By  the  end 
of  September,  1921,  the  note  circulation  rose  to  mk.  86,384  million. 
Concurrent  with  the  increase  of  paper  money  the  gold  reserves 
declined  from  mk.  2550  million  on  November  7,  191 8  to  mk. 
1092  million  on  June  30,  1 920,  because  of  payments  for  fooH 
imports. 


(b)  Analysis  of  Total  Notes  in  Circulation— 

The  total  note  circulation  on  August  31,  1920,  amounted  to 
over  mk.  72,000  million,  of  which  the  largest  part  consisted  of 
Reichsbank  notes,  a  substantial  portion  of  Loan  Bureau  notes,  and 
relatively  small  sums  of  treasury  notes  and  private  bank  notes. 
The  distribution  is  shown  herewith: 

Analysis  of  Note  Circulation 
(in  million  marks) 


Per  cent 


Reichsbank  notes 

Government  treasurj'  notes  {Rcichskasscnscheine) 

Loan  bureau  notes  {Darlehnskassenscheine) 

Private  bank  notes 

Total 


However  not  all  of  this  paper  money  is  in  actual  circulation  in 
Germany  The  amount  held  in  Belgium  is  about  mk.  6000  million 
and  in  France  about  mk.  4000  million,  and  other  large  amounts 
were  bought  and  held  on  speculative  account  in  the  neutral  countries 
of  Europe  as  well  as  in  North  and  South  America.  Bendix  esti- 
mates that  mk.  20,000  million  are  held  outside  of  Germany  and 


GERMAN  CURRENCY  AND  CREDIT  275 

that  another  mk.  gooo  million  are  hoarded  by  the  population  in 
the  attempt  to  evade  the  drastic  taxes. 

(c)  The  Causes  of  the  Increase  in  Note  Circulation — 

A  prime  cause  for  the  increase  in  note  circulation  was  the 
policy  of  financing  the  war  by  loans.  Other  less  fundamental 
causes  appeared  from  time  to  time.  During  the  month  preceding 
the  armistice,  when  the  military  collapse  of  Germany  was  impend- 
ing, the  public  became  panicky  and  entertained  fears  as  to  the 
solvency  of  the  banks  and  even  as  to  the  possibility  of  a  moratorium. 
Therefore,  they  withdrew  their  deposits  from  commercial  and 
savings  banks  and  hoarded  the  paper.  In  the  month  from  Septem- 
ber 24  to  October  23,  19 18,  the  total  note  circulation  increased 
by  mk.  2652  million  as  against  one-quarter  that  figure  in  the 
corresponding  period  in  191 7.  Another  cause  of  increases  in  notes 
issued  which  became  effective  in  1919  was  legislation  requiring 
banks  to  reveal  their  clients'  holdings  of  stock  and  bonds.  This 
measure  caused  heavy  selling  of  securities  and  the  hoarding  of 
paper  money.  Again  the  levy  on  capital  was  an  incentive  to 
wealthy  people  to  convert  their  taxable  goods  into  a  form  that 
was  less  liable  to  detection.  Then  again  the  so-called  "hole  in 
the  west,"  the  occupied  territory,  was  not  controlled  by  the 
German  customhouses  and  the  large  volume  of  im.ports  paid  for 
In  German  paper  money  caused  an  artificial  shortage  in  Germany 
proper.  During  19 19  and  1920  notes  were  issued  to  pay  for 
reparation  in  France  and  for  reimbursement  of  owners  of  property 
taken  by  Germany.     Low  discount  rates  made  inflation  possible. 

(d)  Pleasures  for  Relieving  the  Lack  of  Currency  ^^ — 

I.  Note  issues  by  towns  and  chambers  of  commerce — 
When  the  shortage  in  currency  became  acute  the  local  communities 
undertook  to  supply  the  deficiency.  For  instance  Hamburg  and 
many  other  German  tov/ns  issued  50-pfennig  notes.^'*  By  the 
autumn  of  191 7  over  50  municipalities  had  availed  themselves  of 
the  right  to  issue  emergency  paper  money.  These  issues  became 
very  extensive  and  the  imperial  authorities  attempted  to  check  the 
practice  by  requiring  that  against  any  such  issue  a  balance  of  equal 

"Address  of  Herr  Havenstein,  President  of  the  Reichsbank,  published 
in  the  Frankfurter  Zeitung,  October  31,  1918. 
^'London  Econonr.ist,  April  28,  1917. 


276        INTERNATIONAL"   FINANCE    AND    ITS    REORGANIZATION 

amount  must  be  kept  In  the  Reichsbank  as  security  for  redemp- 
tion.^' About  the  time  of  the  armistice,  the  shortage  became  so 
acute  that  the  municipalities  issued  emergency  notes ;  for  instance 
the  town  of  Mannheim  issued  mk.  10  million  and  Berlin  mk.  47 
million.^®  The  difficulties  of  securing  wide  circulation  w^ere  over- 
come by  municipal  regulations,  for  example  the  Frankfort  street 
railway  agreed  to  accept  the  emergency  money  not  only  of  Frank- 
fort but  also  of  Hanau,  Hoechst,  Offenbach,  and  the  Hanau 
district.^^  The  emergency  currency  issued  in  the  last  quarter  of 
191 8  was  wholly  withdrawn  from  circulation  in  the  early  part 
of  1919,  and  was  replaced  by  aluminum  pfennig  pieces  of  the 
empire.  To  decrease  the  volume  of  notes  outstanding  the  Reichs- 
bank encouraged  payment  by  check,  by  developing  the  system  of 
Giro  Verkehr  and  by  increasing  the  number  of  clearing  houses.^® 

2.  The  use  of  interest  coupons — ^Although  the  towns  were 
asked  by  the  imperial  government  to  prepare  emergency  notes  in 
the  autumn  of  19 18  the  shortage  remained  unrelieved.  In  order 
to  create  immediately  an  additional  medium  of  circulation,  the 
interest  coupons  on  the  war  loan  Avhich  were  due  on  January  2, 
1919,  were  declared  by  the  Bundesrat  to  be  legal  tender  up  to  the 
due  date.  By  this  means  mk.  600  million  were  added  to  the  cir- 
culation. 

3.  Private  printing  establishments  utilized — ^When  all 
the  measures  adopted  were  found  to  be  inadequate,  the  Reichsbank 
turned  to  ordinary  printing  establishments  to  print  new  bank 
notes  of  mk.  50  which  the  official  printing  plant  was  unable  to 
turn  out  in  sufficient  quantity.^^ 

(e)  Loan  Bureau  Notes,  Darlehnskassenscheine  -'^ — . 

The  increase  in  the  Reichsbank  notes  alone  does  not  indicate 

"London  Economist,  September  22,  1917. 

For  illustrations  of  emergency  coinage  and  notes  see  Benjamin  White, 
Currency  of  the  Great  War.    London:  Waterlow  and  SonSj  Ltd.,  1921. 

^^Koelnische  Zeitung,  October  22,  1918.  Wirtschaftszeitung  der 
Zentralmaechte,  November  i,  1918. 

"Frankfurter  Zeitung,  November  24,  1918. 

^Reichsbank  report  for  1919.  See  also  Federal  Reserve  Bulletin, 
June,  1920. 

"  Norddeutche  Allgemeine  Zeitung,  October  20,  1918. 

^Lammers,  Die  Tatigkeit  der  Darlehnskassen.  Die  Bank,  January, 
1915,  pp.  32-37. 


GERMAN   CURRENCY   AND   CREDIT  277 

the  extent  of  the  inflation  of  paper  money.  The  loan  bureaus 
were  authorized  to  issue  notes  not  to  exceed  mk.  1500  million 
under  the  original  act,  but  this  maximum  could  be  raised  by  order 
of  the  Bundesrat.  The  volume  of  notes  issued  increased  to  mk. 
12,911  million  by  November  7,  1918,  just  before  the  armistice. 
In  contrast  to  this  increase  during  a  period  of  four  5'ears,  the  issue 
of  loan  bureau  notes  in  the  19  months  follovv^ing  the  armistice 
increased  by  mk.  18,036  million.  The  additional  notes  issued 
during  19 19  amounted  to  mk.  9269  million  and  during  the  first 
half  year  of  1920  the  additional  notes  were  mk.  6052  million. 

Under  the  war  legislation  the  Reichsbank  was  authorized  to 
substitute  the  Darlehnskassenscheine  for  gold  in  its  cash  reserve. 
The  notes  of  the  loan  bureau  were  exchanged  by  the  Reichsbank 
for  its  ov/n  notes,  the  latter  then  retained  the  loan  bureau  notes 
as  a  "cash"  cover  and  thereupon  issued  three  times  the  amount  in 
its  own  notes.  For  this  reason  the  loan  bureau  notes  in  circula- 
tion were  always  less  than  the  total  amount  issued.  As  additional 
Reichsbank  notes  were  issued  more  Darlehnskassenscheine  were 
withdrawn  from  circulation  and  placed  in  the  Reichsbank  to  in- 
crease the  cash  reserve.  On  November  7,  191 8,  only  mk.  9518  mil- 
lion of  the  loan  bureau  notes  were  outstanding,  although  mk.  12,911 
million  had  been  issued.  The  difference,  mk.  3393  million,  were 
retained  by  the  Reichsbank  to  help  support  an  increase  of  Reichs- 
bank notes  in  circulation  of  mk.  14,050  million  since  August, 
1 91 4.  From  November  7,  19 18,  to  June  30,  1920,  the  Dar- 
lehnskassenscheine in  circulation  increased  mk.  41 15  million  while 
the  balance  of  the  amount  issued,  13,921  million,  had  been  turned 
over  to  the  Reichsbank  to  support  an  increase  in  the  Reichsbank's 
note  circulation  of  mk.  37,016  million.  A  particularly  interesting 
aspect  of  the  workings  of  this  device  to  increase  the  note  issue  was 
the  experience  during  the  first  half  year  of  1920.  During  this 
period  the  Reichsbank  notes  in  circulation  increased  mk.  18,277 
million  and  not  only  the  total  loan  bureau  notes  issued,  about  mk. 
6052  million,  were  turned  over  to  the  Reichsbank,  but  in  addition 
mk.  148  million  of  loan  bureau  notes  were  withdrawn  from 
circulation  for  this  purpose.  In  brief,  the  issue  of  Darlehnskassen- 
scheine was  the  means  of  increasing  by  threefold  the  additional 
Reichsbank  note  circulation.  The  following  table  shows  the  total 
loan  bureau  notes  issued  and  in  circulation: 


27S         IXTERXATION.^L    nN".\>'CE    .OTD    ITS    REORG.'OrLZATIOX 

Loan  Bxtreau  Notes  ^ 
(in  uuliion  inarki! 


Dare 

Total 

Circula-^ 

Da:r 

Total 

Circula- 

li-ue 

tlC-l 

i~5ue 

tion 

1014: 

1918: 

Tanuar>'       7 . . . 

June 

30... 

9>474 

7,582 

June           30. . . 

;       "" 

November  7... 

I3,QII 

9,5iS 

July           23... 

Decoober 

31- -- 

15,626 

10,109 

July          31... 

.... 

.... 

December  31 . . . 

1^317 

446 

i  1919: 

June 

30... 

20.889 

12,027 

1915: 

*, 

December 

31... 

24,895 

13-7SI 

June          30. . . 

.         1,25s 

70s 

December  31... 

-          2^7 

972  : 

1920: 

1      March 

31--- 

27.78/ 

i5-:3i 

1916: 

Jime 

23... 

29,857 

I3-2S5 

June           30. 

-          2.033 

i>3i6 

June 

30... 

30,947 

13,633 

December  31 . . . 

-1       3,408 

2,873 

191 7: 

[ 
1 

June           30. . . 

-'    s-o:6 

4-321 

December  31. . . 

.     7.6S9 

6.26s 

' 

•Amount  held  by  the  Reichsbank  deducted. 

(f)   Imperitil  Treasury  'Sotes,  Reichskcssenscheine — 

In  addition  to  the  notes  of  the  Reichsbank  and  of  the  loan 
bureaus  the  total  note  circulation  included  mk.  360  million  of 
imperial  treasun*  notes,  the  origin  and  increase  of  which  were 
referred  to  above.  Furthermore  the  four  private  banks  that  retained 
the  privilege  of  note  issue  had  about  m.k.  352  million  in  circula- 
tion. Finally,  the  municipalities  and  communities  issued  about 
mk.  200  million  of  emergency-  paper,  particularly  in  small  denomi- 
nations. 

iv.  Deposits 

The  statements  of  the  Reichsbank  since  the  beginning  of  the 
war,  shown  above,  present  a  clear  picture  of  the  increase  in  deposits. 
Up  to  the  time  of  the  signing  of  the  armistice  deposits  increased 
mk-  8068  million  above  the  amount  outstanding  on  July  31.  19 14. 
This  is  approximately  a  rate  of  increase  of  mk.  2000  million  a 
year.     In  the   1)2  years  approximately  between  the  date  of  the 


^  From  the  Bendix  memorandum. 


GERitAN   CUJJLCKCV   AND   CILEDIT  279 

armistice  and  June  30,  1 920,  deposits  increased  mk.  14,088  million, 
a  growth  at  the  rate  of  about  mk.  9000  million  a  3ear.  The 
increase  of  course  was  due  to  the  fact  that  the  government  redis- 
counted  large  quantities  of  Treasury  bills  at  the  Reich-bank. 

D.  Effects  of   Inflation' 

There  are  many  indicators  of  the  eftects  of  inflation:  A 
premium  on  gold  at  home,  or  if  this  is  illegal  the  disappearance 
of  hard  money,  the  rise  of  foreign  exchange  rates,  a  rise  in  prices, 
and  an  increase  of  profits  of  industn,-  and  banks. 

i.  Depreciation  of  Currency 

In  the  early  stages  of  the  war  a  premium  on  gold  was  ofiered, 
but  was  made  illegal  b}'  war  legislation.--  However,  the  working 
out  of  economic  laws  was  inevitable.  The  court  records  show 
prosecutions  for  trading  in  gold.  In  fact,  the  prohibition  on  the 
free  exchange  of  paper  and  gold  caused  greater  depreciation  of 
German  paper  money  within  Germany  than  in  the  neighboring 
neutral  countries.  That  is  in  the  spring  of  1918,  i  gold  mark  was 
equivalent  to  3  paper  marks  in  Germany,  but  to  only  2  paper 
marks  abroad.  The  prohibition  on  oflerir.g  or  accepting  a  premium 
on  gold  within  Germany  resulted  in  the  exportation  of  gold  in 
order  to  obtain  the  premium  abroad.  The  prohibition  on  the  free 
exchange  of  paper  and  gold  likewise  resulted  in  the  disappearance 
of  gold  and  silver  in  circulation  and  in  the  need  for  the  substitu- 
tion by  iron,  zinc  and  aluminum  coins. 

Eventually  the  discount  on  paper  money  was  officially  recog- 
nized; the  government  decreed  in  November,  1919,  that  100  gold 
marks  were  to  be  the  equivalent  of  475  paper  marks  in  the  pay- 
ment of  import  duties,  a  discount  of  approximately  79  per  cent 
on  paper.  The  Reichsbank  likewise  officially  recognized  the 
depreciation  of  paper  in  terms  of  silver,  the  ratio  being  i  mark 
silver  to  8  marks  of  paper.--^  Of  course  the  relatively  slight  rise  in 
the  price  of  silver  affected  the  ratio.  Again,  the  Germ.an  Minister 
of  Public  Works  in  the  summer  of  1919  fixed  prices  at  which 
foreign  gold  coins  should  be  accepted  by  the  German  railways. 

*-  Goins,  p.  543. 
*^  Vorwarts,  Feb.  13,  1920. 


28o        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


The  British  sovereign  which  at  parity  was  equal  to  20.43  marks 
was  fixed  at  51.05  marks;  10  Dutch  florins,  which  at  parity  were 
equal  to  16.88  marks,  were  fixed  at  42.15  marks;  and  the  American 
dollar,  at  parity'  4.2  marks,  was  fixed  at  10.45  marks.  The  deprecia- 
tion of  gold  was  evident  early  in  the  v/ar,  particularly  in  trade 
with  the  neutrals.  Large  shipments  which  were  sold  on  a  gold 
basis  were  held  up  on  the  German  frontier  by  the  Dutch  authori- 
ties because  paper  money  was  tendered  in  payment.^^ 

The  prohibition  on  the  free  exchange  of  depreciated  paper  for 
gold  led  to  a  peculiar  phenomenon  during  the  war,  particularly  in 
the  spring  of  19 18.  In  the  neutral  countries,  American  paper 
money  was  bought  up  by  Germany  at  rates  more  favorable  than 
the  equivalent  of  the  American  dollar  exchange  in  the  neutral 
markets. 

ii.  Rise  in  Prices^'*' 
(a)   Course  of  Rise — 

Until  1920  there  was  available  neither  an  official  nor  a  standard 
index  of  commodity  prices  in  Germany.  But  the  course  of  prices 
during  the  war  can  be  obtained  from  the  "standard  food  budget" 
compiled  by  Calwer  from  the  average  of  official  maximum  prices 
for  about  200  localities  and  based  on  the  peace-time  ration  of  the 
seamen  of  the  German  navy,  but  calculated  for  a  family  of  four 
persons. 


1913. 
marks 

1914, 
marks 

1915, 
marks 

1916, 
marks 

1917, 
marks 

1918, 
marks 

1919, 
marks 

April 

25.61 

24.96 
26.41 

34-41 
39-13 

51-78 
53-53 

54-81 
54-67 

57-13 
59-43 

69.65 

August 

85-45 

Relative  figures  based  on  April,  1913,  as  100 

April 

100 

97 
103 

134 
152 

202 
209 

214 
213 

223 
232 

272 

August 

334 

"'New  York  Times,  August  15,  1917. 

^^Englander,  Oskar,  Fragen  des  Preises,  Schmollers  Jahrbuch,  1919, 
xliii,  pp.  933-981,  and  1395-1458.     A  study  of  price  theories. 

Statistisches  Jahrbuch  fur  das  Deutsche  Reich,  section  ix,  Preise,  gives 
record  of  prices  for  ten  years  for  a  great  number  of  commodities. 

Vierteljahreshefte  zur  Statistik  des  Deutschen  Reichs,  gives  the  monthly 
average  prices  of  important  commodities. 


GERMAN   CURRENCY   AND   CREDIT 


281 


These  official  maximum  prices,  however,  do  not  represent  the 
entire  rise.  There  was  illicit  trading  at  higher  prices  and  uncon- 
trolled prices  also  entered  into  the  cost  of  living.  Furthermore, 
after  191 9,  during  the  period  of  vast  increases  in  the  note  circu- 
lation outstanding,  prices  rose  more  rapidly  than  during  the  war. 
Until  August,  19 18,  prices  had  risen  to  only  2.3  times  the  pre- 
war level,  but  in  the  following  year  the  increase  was  almost  as 
great  as  in  the  entire  four  years  preceding.^^ 

The  rise  in  the  price  of  raw  materials  was  much  more  rapid 
after  the  armistice  and  in  response  to  the  inflation  of  the  currency. 
The  figures  in  marks  per  ton  of  hematite  iron  ore  were  as  follows.^® 


1914 

Nov.  I, 
1919 

Dec.  I, 
1919 

Jan.  I, 
1920 

Feb.  I, 
1920 

Actual  price 

79-50 
100 

573-50 
725 

1171.50 
2470 

1718.50 
2160 

2227.50 
2800 

Relative 

The  price  of  the  best  Ruhr  coal  (nut  size)  in  marks  per  ton  like- 
wise rose  more  rapidly  during  the  period  of  great  increase  of 
circulation,  as  follows: 


1914 

Oct.,  1919  Dec,  1919 

Jan.,  1920 

Feb.,  1920 

Actual  price 

13 
100 

86 
665 

97 

745 

118 
910 

160 

Relative 

1230 

(b)   Extent  of  the  Rise — 

From  19 1 4  to  1920  the  average  increase  of  living  expenses  was 
over  sixteenfold.^^  The  item  showing  the  largest  increase  was 
eggs,  the  price  of  which  in  1920  was  32  times  the  191 4  price. 
The  smallest  increase  was  in  house  rents  which  rose  only  20  per 
cent,  owing  to  the  maximum  allowance  set  by  law.     Carfares  also 


^  From  the  Deutscher  Reichsanzeiger  (Berlin),  December  19,  1919. 
Reprinted  in  the  U.  S.  Labor  Review,  April,  1920. 

"'Berlin  correspondence,  London  Economist,  February  14,  1920.  For 
additional  information  on  prices  see  British  Board  of  Trade  Journal, 
October  3,  1918,  and  Commerce  Reports,  December  30,  1918. 

^'  Compiled  by  the  American  Association  of  Commerce  and  Trade  in 
Berlin.  See  also  the  Bavarian  Statistical  Year  Book  for  1919,  abstracted 
in  the  Monthly  Labor  Review,  April,  1920. 


282 


INTERNATIONAL    PINANCE    AND    ITS    REORGANIZATION 


showed  a  moderate  increase  of  only  600  per  cent.  The  imported 
commodities,  such  as  cloth  and  clothing,  shoes  and  meat,  showed 
the  largest  increase.    The  table  is  given  herewith: 


Commodities 


1914, 

Marks 


1920, 
Marks 


Ratio 
1920  to 

1914 
prices,  in 
per  cent 


Food: 

Potatoes,  10  lb 

Butter,  per  lb 

Eggs,  per  doz 

Meat  per  lb.  (average  between  pork  and 
beef) 

Common  vegetables  (average  between 
various  kinds  of  vegetables) 

Bread  (i-lb.  loaf) 

Coal  (brickets)  per  cwt 

Clothing : 

Men's  suits,  ready-made 

Men's  suits,  tailor-made 

Men's  shoes 

Cloth  for  women's  clothes,  per  meter.  .  . 

Cloth  for  women's  clothes,  muslin,  per 

meter 

Carfare 

Rent: 

Apartment  of  five  rooms  per  month .... 
Amusements: 

Theater 

Moving  pictures 


0.30 

I -25 
0.65 


0-45 
1. 00 

60.00 

80.00 

12.50 

7  50 


0.50 


4.00 
17.00 
21 .00 

24.00 

4.00 

4  50 

23   50 

1300.00 

2000.00 

300.00 

175.00 

39.00 
o.  70 

150.00 

8.00 
2.00 


Average  of  living  expenses . 


1333 
1360 

3230 
2400 

1600 
1000 
2350 

2100 
2500 
2500 
2330 

1560 
700 


533 
400 


1620 


The  increase  during  1920,  according  to  the  index  number  of 
the  Frankfurter  Zeitung,  was  as  follows: 

January lOO 

March 1 47 

June     149 

September 144 

December    156 

(c)    The  Lag  in  Wages  and  Cost-of-Living  Subsidies — 

The  rise  in  the  cost  of  living  was  followed  naturally  by  a  rise 
in  wages.  However,  these  lagged  far  behind.  For  instance  the 
wages  of  a  cabinetmaker  rose   from  about  mk.  43   per  week  in 


GERMAN   CURRENCY   AND   CREDIT 


283 


1913  to  mk.  336  per  week  in  1920,  or  about  7.8  times.  In  the 
several  trades,  the  wages  of  unskilled  labor  increased  to  a  greater 
extent  than  did  those  of  the  artisan,  whereas  clerical  help  increased 
least  of  all.    The  table  for  a  few  trades  is  given  herewith.-^ 


Tradesman 


9-hour 
day 


1920, 

8-hour 

day- 


Ratio 

1920  to 

to 

1913 


Cabinetmaker 

Plumber 

Electrician 

Typesetter 

Bricklayer 

Unskiller  labor 

Conductor,  street  railway 

Laborer 

Clerk,  bookkeeper,  stenographer 


43.20 
40.50 

39- IS 
37.00 
44.28 
30.78 
30.00 
20.50 
40.00 


336 
220 
204 
230 
216 
206 
218 
206 
190 


The  great  gap  between  the  rise  in  commodity  prices  and  the 
rise  in  wages  caused  a  hardship  on  the  poor.  An  investigation 
conducted  by  the  German  Bureau  of  Labor  Statistics  ^®  shows  that 
the  deficits  in  family  budgets,  which  at  first  had  affected  only  the 
poorer  classes,  later  on  also  affected  the  moderately  well-to-do, 
whose  incomes  were  relatively  reduced  by  the  rise  in  prices  result- 
ing from  inflation.  The  average  monthly  deficit  per  person 
employed  was  mk.  20.30  in  the  families  of  laborers  and  mk.  49.33 
in  the  families  of  government  clerks.  To  meet  these  deficits  the 
government  authorized  the  granting  of  subsidies.  In  19 19  mk. 
3000  million  ^°  were  devoted  to  food  subsidies.  This  was  equivalent 
to  50  marks  per  annum  per  head  of  the  population.  How  pitifully 
inadequate  this  must  have  been  can  be  seen  by  comparing  this 
subsidy  of  mk.  50  per  head  per  annum  with  the  actual  budget 
deficit  of  mk.  49  per  worker  per  month.  The  policy  of  subsidizing 
must  fail  because  out  of  the  total  increase  in  note  circulation, 
which  causes  a  rise  in  prices,  only  a  small  fraction  can  be  devoted 
to  the  granting  of  subsidies,  whose  object  is  to  overcome  the  entire 
rise  in  so  far  as  it  affects  the  poor. 

^'American  Association  of  Commerce  and  Trade  in  Berlin,   ibid. 

^  Statistisches  Reichsamt,  Abteilung  fur  Arbeiterstatistik.  Beitrage  zur 
Kenntnis  der  Lebenshallung  im  vierten  Kriegsjahre  (21.  Sonderheft  zum 
Reichs-Arbeitsblatt).     Berlin,  1919. 

Reprinted  in  U.  S.  Labor  Review,  January,  1920. 

*"  Berlin  correspondence,  Journal  of  Commerce,  April  12,  1920. 


284        INTERNATIONAL   FINANCE   AND    ITS    REORGANIZATION 


iil.  The  Increase  of  Deposits  and  Profits 

a.  The  Reichsbank  turnover  and  profits — Perhaps  the  most 
direct  effect  of  inflation  is  to  be  noted  in  the  turnover  of  the  Reichs- 
bank. In  1913  this  figure  amounted  to  mk.  422  billion,  in  1 916  it 
reached  lOOO  billion,  in  1917  it  exceeded  13 13  billion,  and  in  1918 
the  total  turnover  of  the  Reichsbank  was  3343  billion,  an  increase 
to  almost  ninefold  the  19 13  figurre.  Correspondingly  the  total 
gross  profits  likev/ise  increased  from  133  million  marks  in  1 9 14,  to 
273  million  in  1915,  326  million  in  1916,  365  million  in  1917,  and 
814  million  in  1918.  The  largest  part  of  this  profit  consisted  of 
profits  on  bills,  checks  and  imperial  government  bonds.^^ 

b.  The  effect  on  the  private  banks — ^The  effects  of  inflation  are 
evident  from  a  study  of  the  balance  sheets  of  the  eight  leading 
banks  of  Germany. 

Consolidated  Statement  of  Eight  ^^  Leading  Banks  of  Germany,  as  of 
December  31  of  Each  Year 

(in  million  marks) 


Items 

Assets: 

Cash,  coupons,  foreign  gold,  and 
balance  with  banks  of  issue  and 
clearing 

Bills,  including  treasury  bills 

Due  from  banks 

Stock  exchange  loans  and  advances . 

Advances  on  merchandise 

Securities  owned 

Syndicate  participations 

Participations  in  banks  and  banking 
firms 

Debits  in  current  account 

Sundry  assets 

Total 

LABILITIES 

Capital  paid  in 

Surplus  and  reserve 

Credits  in  current  account 

Acceptances  and  checks 

Sundry  liabilities 

Total 


191S 


1916 


1917 


191S 


1919 


35S 
1766 
308 
794 
Sio 
402 
336 

272 

2853 

147 


S77 
1819 
337 
741 
175 
437 
337 

3S7 

3232 

181 


736 
2493 
410 
894 
210 
443 
308 

360 

187 


863 
3,961 
635 
1,334 
262 
441 
267 

3.394 
192 


1.26s 

7.152 

1.346 

1,828 

21S 

S78 

238 

354 

4.536 

211 


1.423 

11,281 

1.073 

1.986 

115 

791 

246 

368 

4,694 

223 


2. 540 

23,097 

3,574 

1.60s 

851 

587 

242 

359 

9.274 

233 


iios 

560 

4804 

1309 

i6s 


8193 


12S5 

457 

5321 

1016 

144 


12SS 
457 

6S56 
612 
174 


1,25s 
461 

9.396 
385 
203 


1.350 

540 

15,210 

397 

226 


1. 350 

547 

19.696 

359 


42.362 


i,3SO 

553 

39,140 

958 

361 


7743 


8193 


9354 


11,700 


17,723 


42,363 


"  Deutscher  Allgemeine  Zeitung,  March  31,  1919,  reprinted  in  Com- 
merce Reports,  July  8,  1919. 

^  Federal  Reserve  Bulletin,  October,  1920.  The  banks  are  Deutsche 
Bank,  Disconto-Gesellschaft  in  Berlin,  Dresdner  Bank,  Bank  fiir  Handel 
und  Industrie  (Darrastadter  Bank),  Commerz-  und  Disconto-Bank, 
Berliner  Handelsgesellschaft,  Nationalbank  fiir  Deutschland  and  Mittel- 
de'Usche  Creditbank. 


GERMAN  CURRENCY  AND  CREDIT 


285 


A  comparison  of  the  consolidated  balance  sheets  for  these  eight 
banks  as  of  the  end  of  the  years  1913  to  1919  shows  an  increase  of 
cash  of  sevenfold,  an  increase  of  bills,  including  treasury  bills,  of 
over  thirtcenfold,  an  increase  of  the  item  "Due  from  banks"  of 
about  twelvefold,  and  lesser  increases  in  the  items,  "Debits  in  cur- 
rent account,"  "Credits  in  current  account,"  and  "Total  assets  or 
liabilities."  The  capital  increases  were  slight,  about  20  per  cent. 
Advances  on  merchandise  among  the  debits,  and  acceptances  and 
checks  among  the  credits,  decreased  through  19 18,  as  was  to  be 
expected,  owing  to  the  displacement  of  commercial  credit  by  govern- 
ment financing.  However,  in  191 9  both  these  items  showed  a 
marked  increase. 

The  foregoing  table  gives  the  items  in  million  marks.  The 
changes  in  the  statements  of  these  banks  become  more  evident  if 
the  relative  figures  based  on  1913  returns  as  100  are  given: 

Relative  Figures  in  Consolidated  St.atement  of  Eight  Leading  Banks 
(1913  figures  =  100) 


Items 

Cash 

Bills,  including  treasury  bills 

Due  from  banks 

Debits  in  current  amount . . . 

Capital  paid  in 

Credits  in  current  account. . 
Acceptances  and  checks .... 

Total  assets  or  liabilities 


1913 


I9I4 

191S 

1916 

1917 

1918 

163 

208 

243 

356 

401 

103 

141 

224 

405 

639 

109 

133 

206 

437 

34« 

113 

116 

119 

159 

1^5 

"3 

113 

113 

122 

122 

III 

142 

195 

316 

410 

7« 

47 

29 

30 

27 

106 

121 

151 

229 

287 

I9I9 


ICXD 
100 
100 
100 

100 
ZOO 
100 


719 

1309 

1160 

325 

122 
81S 

73 
547 


As  in  the  Reichsbank  statement  it  is  difficult  to  trace  the  extent 
to  which  government  paper  displaced  com.mercial  paper  among  the 
assets  of  the  private  banks  because  they  too  merged  commercial 
bills  with  treasury  bills.  Since  the  combined  item  consisted  chiefly 
of  treasury  bills,  the  ratio  of  bills  to  total  assets  would  indicate 
the  extent  to  which  government  paper  became  the  chief  resource  of 
the  banks. 


Item 

1913 

1914 

1915 

1916 

1917 

1918 

1919 

Percentage  of  bills  to  total 
assets  at  end  of  year .  .  . 

22.8 

22.  2 

26.7 

33-9 

40.3 

50-3 

56.6 

286        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

c.  Increase  of  savings  banks  deposits — During  the  war,  with  the 
ever-increasing  flood  of  paper  money,  and  with  the  diminishing 
supplies  of  commodities  available  for  purchase  (and  most  of  these 
rationed  and  sold  at  fixed  prices)  the  deposits  of  the  savings  banks 
increased  by  leaps  and  bounds.  The  combined  German  savings 
banks  showed  net  increases  in  deposits  of  mk.  1121  million  in  1914, 
2541  million  in  1915,  2660  million  in  1916,  and  4160  million  in 
1917,  or  taking  the  1914  returns  as  a  basis  of  100  the  deposits 
in  1 91 5  were  2.26  times  as  great,  in  191 6  2.37  times  and  in  1917 
3.70  times  as  great  as  in  191 4. 

In  Berlin  many  new  branches  of  the  savings  banks  had  to  be 
opened  to  accommodate  the  increasing  number  of  depositors.  Dur- 
ing the  year  191 8  the  total  deposits  in  48  of  the  leading  savings 
banks,  showed  an  increase  of  about  34  per  cent,  although  the  number 
of  depositors  had  increased  only  10  per  cent.^^ 

d.  Increased  profits  in  industry — Along  with  the  rise  in  prices, 
profits  in  industry^  increased  very  largely.  True,  they  were  paper 
profits  and  in  contrast  with  the  prices  of  imported  raw  materials, 
the  fictitious  character  of  paper  profits  became  apparent.  For 
instance  the  General  Electric  Co.  of  Germany,  whose  paid-up 
capital  stock  was  mk.  200  million,  had  to  purchase  copper  amount- 
ing to  mk.  2  million  daily,  so  that  a  100-day  supply  of  copper  was 
equivalent  to  the  total  capitalization  of  the  company.  That  is,  a 
sum  supposed  to  be  sufficient  to  build  the  entire  plant  could  hardly 
purchase  a  three-months'  supply  of  one  raw  material.^ 

Furthermore,  the  large  increases  in  capitalization  which  were 
necessary  to  maintain  adequate  working  capital  under  rising  prices, 
worked  an  injustice  to  the  original  shareholders  who  paid  in  gold 
marks.  However,  this  difficulty  was  circumvented  by  offering  to 
the  existing  shareholders  the  right  to  subscribe  to  new  stock. 

The  rise  in  profits  was  reflected  in  the  rise  in  dividends.  The 
Phoenix  Mining  &  Smelting  Works  raised  its  dividend  from  10 
per  cent  in  191 3  to  20  per  cent  in  191 8.  The  Deutsch-Luxem- 
bourg  Mining  and  Smelting  Co.,  which  paid  no  dividend  in  1913, 
paid  10  per  cent  in  igi8.  The  United  Koenigs  &  Laura  Smelting 
Co.  raised  its  dividend  from  4  per  cent  in  191 3  to  12  per  cent  in 

"  Sozial  Praxis,  January'  17,  1918;  Die  Konjunktur,  February  21,  1918. 
Report  on  German  savings  banks  in  Die  Sparkasse,  reprinted  in  Com- 
merce Reports,  April  15,  1919. 

"Geneva  correspondence,  New  York  Evening  Post,  January  17,   1920. 


GERMAN   CURRENCY   AND   CREDIT 


287 


1 91 8.  The  Mannesmann  Tubing  Works  dividend  rose  from  7^ 
per  cent  in  1913  to  18  per  cent  in  1918,  and  the  Gas  Motor  Manu- 
facturing Co.  from  5  per  cent  in  191 3  to  10  per  cent  in  1918.^^ 

E.  The  Outlook 

It  is  difficult  to  speak  definitely  of  Germany's  financial  outlook 
in  view  of  the  many  uncertain  factors  that  affect  it.  A  few  things, 
however,  may  be  said  fairly  certainly.  The  recommendations  of 
the  Cunliffe  Committee  in  Great  Britain  certainly  cannot  apply  to 
Germany.  Whereas  gradual  deflation  is  practicable  for  Great 
Britain  and  perhaps  even  for  France  and  for  Belgium,  in  Germany 
something  less  time-consuming  and  more  drastic  may  have  to  be  put 
into  effect. 

i.  Gradual  Deflation  Not  Feasible^^ 

In  view  of  the  fact  that  America  is  a  free  gold  market,  the 
dollar  may  be  taken  as  the  equivalent  of  gold  and  therefore  ex- 
change rates  on  the  United  States  reflect  approximately  the  degree 
of  depreciation  of  the  European  currencies.  Germany,  like  most  of 
the  countries  of  central  Europe,  is  sufifering  from  a  depreciation  of 
over  90  per  cent. 

The  demand  exchange  rates  on  November  11,  1920,  were  as 
follows : 


Country 

Germany , 

Finland 

Poland 

Austria 

Czecho-Slovakia 

Hungary 

Jugoslavia 

Roumania 

Servia 


Parity. 
Cents 


19-3 
193 


Demand  rate. 
Cents 


I  13 
2.19 
o.  24 

0.28 
1. 01 
0.18 
o.  70 

1-45 
2.74 


*°  Wirtschaftsdienst,  December  13,  1918. 

•"  Schaefer,  Karl  U.,  Die  legale  Devaluation,  Schmollers  Jahrbuch, 
19x9,  xliii,  pp.  1458-1475,  a  study  of  pros  and  cons  of  deflation  and  re- 
valuation. 


288        INTERNATIONAL   FINANCE    AND    ITS    REORGANIZATION 

These  weak  countries,  of  which  Germany  is  the  most  impor- 
tant, cannot  deflate  their  currency  and  hope  to  bring  it  back  to 
parity.  Of  themselves  and  without  a  vigorous  fiscal  policy  these 
currencies  will  not  become  stable.  Even  with  a  vigorous  fiscal 
policy  and  at  the  rate  of  economic  progress,  before  the  war,  deflation 
from  the  present  levels  would  take  more  than  a  generation. 

With  its  vast  untouched  resources  and  its  huge  tides  of  immigra- 
tion after  the  Civil  War  the  United  States  required  15  years  to 
deflate  a  paper  currency  which  at  its  lowest  (in  1864),  was  quoted 
at  38.7  per  cent  of  the  value  of  gold,  but  which  rapidly  rose  in 
1865  to  46.3  and  in  1866  to  66.0  at  the  "low"  quotation.^^ 

The  weak  countries  of  Europe  listed  above  show  a  far  greater 
depreciation  of  paper  with  respect  to  gold,  and  worse  still  instead 
of  showing  an  improvement  after  the  war  as  the  United  States 
did  in  1865  and  1866,  these  countries  have  further  inflated  their 
currency  and  suffered  further  declines  in  their  exchanges.  In  none 
of  these  countries  is  it  likely  that  the  currency  will  recover  its  pre- 
war parity  within  a  generation,  if  at  all. 

Furthermore,  whatever  injustice  and  suffering  inflation  has 
wrought  is  a  matter  of  the  past.  A  process  of  deflation  would 
mean  a  long  period  of  declining  prices,  of  severe  taxes,  of  repressed 
industry,  and  of  general  stagnation.  Finally,  the  foreign  holdings 
of  a  large  part  of  the  floating  debt  of  most  of  these  countries  will 
tend  to  repress  any  rise  in  the  price  of  paper  money  in  terms  of 
gold.  As  paper  money  increases  in  value,  and  correspondingly  as 
the  exchanges  improve,  the  foreign  holders  will  sell  for  profit  and 
depress  the  exchanges.  August  Mueller,  former  Minister  of  Eco- 
nomics, is  the  authority  for  the  statement  that  Germany's  debt  of 
about  mk.  230  billion  is  probably  redeemable  at  the  present  low 
value  of  the  mark,  but  never  if  the  mark  recovers  even  half  its 
former  value.^^  Deflation  will  mean  the  enriching  of  the  foreign 
speculator  at  the  expense  of  the  recuperative  possibilities  of  the  in- 
dustries. 

ii.  The  Position  Under  Depreciated  Paper 

The  attempt  to  dispense  with  gold  as  a  regulator  of  commercial 
and  financial  values  is  infeasible,  if  not  impossible.    The  absence  of 

*'  Mitchell,  Sound  Currency,  vol.  3,  No.  17. 
**  Berliner  Abendblatt,  April  24,  1920. 


GERMAN  CURRENCY  AND  CREDIT  289 

gold  in  international  settlements  of  Germany  with  other  countries 
v/ould  mean  wide  fluctuations  of  exchanges,  with  all  the  unsettling 
effects  on  industry.  It  would  also  discourage  loans  to  Germany, 
even  of  short  maturity,  because  of  the  likelihood  of  violent  changes 
between  the  dates  of  the  loan  and  the  date  of  its  repayment,  and 
finally,  without  gold  as  the  governor  and  regulator  of  the  volume 
of  paper  money,  the  temptation  to  overissue  is  fatal.  Few  govern- 
ments have  been  able  to  resist  it.^^ 

iii.  Internal  Measures  as  Remedhs 

The  first  essential  for  a  stabilization  of  Germany's  finances,  is 
the  refunding  by  means  of  foreign  loans  of  the  floating  debt  held 
outside  of  Germany.  Until  this  is  done,  the  exchange  rate  of 
Germany  will  be  depressed  below  its  inherent  value,  because  of  the 
continuous  selling  pressure  exerted  on  the  mark  when  it  rises  in 
response  to  an  improvement  in  the  finances  of  Germany.  The 
inducement  to  the  present  holders  of  German  currency  and  of 
German  short-term  bills  to  fund  their  holdings  is  a  likelihood  of  a 
rise  in  German  exchange  and  a  profit  upon  the  redemption  of  the 
long-term  loan. 

However,  international  trade  requires  that  gold  act  as  a  correc- 
tive and  as  a  stabilizer.  Fiat  money  m.ay  do  in  internal  commerce 
but  international  commerce  requires  a  medium  current  everj^^here, 
and  gold  alone  is  such  a  medium.  Yet  the  chief  requirement  for 
the  restoration  of  gold  as  a  governor  is  a  revaluation  of  the  mark. 
What  effect  this  may  have  is  evident  from  the  analogous  situation 
in  France  100  years  ago.  When  the  mandats,  which  had  replaced 
the  ass'ignats,  were  given  currency  at  their  quoted  gold  value  by  the 
decree  of  the  French  National  Assembly  on  July  16,  1796,  there 
was  a  noticeable  improvement  in  the  financial  condition  of  the 
country.  Specie,  which  had  been  in  hiding,  immediately  reappeared 
In  circulation.  Goods  and  commodities  being  very  cheap  were 
exported  in  great  quantities,  the  exchanges  immediately  turned  in 
favor  of  France,  and  within  a  short  time  the  metallic  currency 
was  restored.^" 

The  adoption  of  a  new  parity  would  mean  a  capital  tax  on  the 

*^Kann,   Herbert,    Gold   oder   Papier,   Europaeische    Staats-und-Wirt- 
schafts  Zeitung,  September,  1917. 
**  MacLeod,  ibid. 


290        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

holders  of  securities  and  of  property  bought  at  pre-war  gold  values, 
and  while  it  may  be  unjust  it  is  the  shortest  road  to  the  restoration 
of  financial  health. 


iv.  Allies'  Policies  as  Remedies 

In  addition  to  the  factors  within  her  control  the  restoration 
of  Germany  depends  on  many  conditions  bej'ond  her  control,  such 
as  the  recognition  of  the  economic  difficulties  in  the  peace  treaty, 
the  amelioration  of  the  terms  of  peace  to  enable  Germ.any  to  pay 
the  indemnity,  the  extension  of  credits  to  Germany  by  the  neutral 
countries  producing  raw  materials  secured  perhaps  by  the  German 
properties  seized  by  the  enemy  during  the  war  or  else  by  a  lien 
prior  to  all  other  claims,  including  reparation  and  indemnity 
claims,  much  the  same  as  receivers'  certificates  of  a  corporation,  and 
finally  the  restoration  of  trade  with  Russia  and  the  reestablishment 
of  the  economic  unity  which  prevailed  in  Europe  before  the  war. 
These  are  but  a  few  of  the  economic  elements  which  condition  the 
future  of  Germany,  and  make  a  categorical  prediction  as  to  her 
future  futile. 


Part  Three 

FOREIGN  EXCHANGE 

CHAPTER  IX 
PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR^ 

The  presentation  of  the  movement  of  the  foreign  exchanges  in 
the  United  States,  during  and  after  the  war,  is,  for  several  rea- 
sons, an  essential  part  of  a  study  in  international  finance. 

The  exchange  rates  on  the  United  States  reflect  the  financial 
condition  of  the  European  countries,  which  constitutes  the  object 
of  our  study.  Furthermore,  the  stabilization  of  the  Allied  ex- 
changes during  the  war  was  made  possible  by  the  vast  loans  of  the 
United  States  government  to  the  Allies.  Finally,  because  the 
United  States  has  been  a  free  gold  market  except  during  the  period 
ot  hostilities,  the  exchanges  quoted  in  New  York  are  at  their  gold 
value. 

A.  The  Theory  of  Foreign  Exchange 

i.  Determinants  of  Exchange  Rates 

Exchange  rates  are  determined  by  the  supply  of  and  demand  for 
drafts  between  countries.  If  the  merchants  of  one  country  have 
an  oversupply  of  bills  drav/n  on  another  country,  the  exchange  rates 
of  the  second  country  will  decline.  Before  the  nineteenth  century, 
such  an  oversupply  arose  mainly  from  an  excess  of  commodity  ex- 
ports. The  chief  means  of  liquidating  bills  in  excess  of  demands 
of  trade  was  by  the  shipment  of  gold.  When  gold  and  merchandise 
were  the  chief  determinants  of  exchange  rates,  exports  were  en- 
couraged as  a  means  of  increasing  the  gold  supply  of  a  country. 
Under  the  mercantile  system,  an  excess  of  commodity  exports  was 

*  See  Le  Probleme  des  Changes  chez  les  Belligerants,  Rapport  Generale, 
Chambre,  1919,  No.  6158,  part  of  the  report  on  the  budget  of  France. 

291 


292        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

regarded  as  an  index  of  prosperity.  In  the  relatively  restricted 
economic  life  of  that  period,  an  excess  of  exports  was  regarded  as 
a  favorable  balance  of  trade. 

As  life  has  become  more  mobile,  the  traffic  between  nations  has 
come  to  include  categories  other  than  goods.  Although  the  move- 
ment of  merchandise  constitutes  the  chief  source  of  supply  of  bills, 
other  important  factors  are  the  flow  of  capital  between  countries 
and  the  performance  of  services.  In  modern  times  the  mercantile 
theory  is  discarded.  The  modern  view  of  international  trade  is, 
that  exports  constitute  the  surplus  of  goods  which  it  is  economical 
to  produce  and  to  exchange  for  goods  which  can  be  produced  more 
cheaply  by  other  countries.  There  are  more  means  than  one  for 
settling  an  excess  of  exports  or  of  imports.  A  nice  balance  of  mer- 
chandise imports  and  exports  is  no  longer  regarded  as  being  so  im- 
portant as  the  mercantilists  thought. 

Some  countries  have  a  continuous  excess  of  imports,  which  is 
balanced  by  interest  due  on  foreign  loans,  as  in  England,  or  by 
borrowings  abroad,  as  in  some  of  the  Latin  American  countries 
before  the  war.  On  the  other  hand,  some  countries  have  a  con- 
tinuous excess  of  exports,  which  is  applied  to  the  settlement  of  in- 
terest owed  or  of  loans  maturing.  Other  factors  comprised  in  the 
international  balance  of  debits  and  credits  are  the  flow  of  capital 
arising  out  of  expenditures  of  travelers,  for  pleasure,  study,  or  busi- 
ness, out  of  remittances  and  gifts  between  immigrants  and  their 
friends  and  families.  Foreign  drafts  also  arise  from  the  rendering 
of  international  services,  such  as  shipping,  insurance,  banking  and 
brokerage.  Whatever  the  source  of  the  debt,  drafts  arising  there- 
from have  the  same  effect  as  drafts  based  on  movement  of  com- 
modities. 

(a)  Commodity  Movements — 

In  general  the  older  countries  of  Europe,  such  as  England, 
France,  Germany,  and  Switzerland,  have  an  excess  of  imports  and 
the  younger  countries  such  as  Russia,  the  United  States,  British 
India,  and  Argentina  have  an  excess  of  exports.  During  the  early 
history  of  a  developing  country,  while  it  borrows  money  abroad, 
it  has  an  excess  of  imports.  Subsequently,  it  develops  an  excess  of 
exports  to  pay  the  interest  and  principal  on  its  foreign  loans. 
Finally,  when  it  has  attained  industrial  maturity  and  liquidated 
its  indebtedness  abroad,  it  may  invest  its  surplus  funds.     As  the 


PRINCIPLES   AND   PRACTICE   EN   THE   WORLD   WAR  293 

Interest  due  to  It  accumulates,  it  develops  an  excess  of  imports. 
Examples  of  this  development  may  be  found  in  the  statistics  of 
international  trade  prior  to  the  war  or  in  the  industrial  history  of 
the  older  countries. 

(b)  The  Flow  of  Capital— 

The  movement  of  funds  between  the  nations  is  the  second 
principal  factor  affecting  exchange  rates.  When  a  country  borrows, 
it  obtains  a  supply  of  bills  upon  the  lending  country,  just  as  if 
the  borrower  had  exported  goods  to  the  lender.  During  the  life  of 
the  loan,  only  the  interest  paj'ments  affect  exchange  rates.  The 
lender  receives  annually  a  supply  of  bills  on  the  borrower,  which 
tend  to  depress  the  exchange  rate  of  the  borrower  and  to  raise  the 
exchange  rates  of  the  lender.  In  the  meantime,  the  principal  has 
no  effect  on  the  exchanges.  When  the  loan  matures,  the  payment 
of  the  principal  has  a  similar  effect  as  the  pa5^ment  of  interest.  It 
may  seem  strange  that  borrowing  should  have  the  effect  of  an  in- 
crease of  commodity  exports.  However,  this  principle  is  con- 
tinually applied  in  normal  times.  When  the  exchange  rates  of  a 
country  fall  owing  to  an  excess  of  imports,  the  central  bank  raises 
its  interest  rate  to  attract  foreign  funds.  By  borrowing,  a  country 
may  temporarily  correct  an  adverse  exchange  rate,  resulting  from 
an  excess  of  imports.  On  the  other  hand,  the  rise  of  the  exchange 
rate  above  the  gold  parity,  as  a  result  of  an  excess  of  exports  may 
be  corrected  by  lending  money  abroad.  The  central  bank  attains 
this  end  by  reducing  its  interest  rate. 

Finance  bills  are  short-term  loans,  issued  by  bankers  at  a  period 
of  the  year  when  there  are  insufficient  export  bills  available.  At  a 
later  season  of  the  j'ear,  when  exports  increase,  the  finance  bills  are 
paid  off  out  of  the  proceeds  of  commercial  bills.  The  finance  bill 
resembles  an  accommodation  note  in  its  function  in  that  in  both 
cases  a  person  makes  a  loan  without  paying  cash.  Like  the  short 
seller  who  buys  later,  the  issuer  of  finance  bills  liquidates  by  buying. 

(c)  Remittances  of  Funds — 

Remittances  sent  to  a  country  tend  to  raise  its  exchange  rate. 
The  vast  sums  sent  to  Italy  by  immigrants  or  taken  back  with  them 
either  seasonally  or  upon  their  final  return  to  their  native  land 
constituted  an  important  item  in  the  Italian  trade  balance.     Simi- 


294        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

larly,  the  expenditure  of  tourists,  of  business  men,  and  of  students 
aided  in  the  maintenance  of  the  exchanges  of  those  European  coun- 
tries which  had  no  large  investments  abroad  or  performed  none  of 
the  international  services  such  as  shipping  or  banking.  France, 
Ttal}^  and  Switzerland  derived  considerable  funds  from  these 
sources. 

(d)  Drafts  for  Services  Performed — 

Services  performed  for  other  nations  are  equivalent  to  exports 
of  commodities  in  their  effect  on  exchange  rates.  Shipping,  jobbing, 
insurance  and  banking,  carried  on  by  the  nationals  of  Great  Britain 
have  made  it  possible  for  her  to  have  an  excess  of  imports.  Norv\^ay 
derived  an  income  of  about  220  million  kroner  in  1913  from  her 
shipping  and  her  excess  of  imports  amounted  to  about  160  million 
kroner. 

The  development  of  an  American  merchant  marine,  or  Ameri- 
can insurance  facilities,  and  the  popularization  of  the  dollar 
draft  internationally  will  furnish  the  United  States  with  inter- 
national credits  in  addition  to  its  commodity  exports.  In  fact, 
these  three  services,  in  addition  to  the  annual  interest  accruing 
to  the  United  States,  will  probably  cause  ultimately  a  decline  of 
exports  or  an  increase  of  imports  and  a  net  excess  of  imports. 

(e)  Summary — 

A  country's  demand  for  exchange  is  created  not  only  by  mer- 
chandise imports,  but  also  by  the  invisible  debits,  loans  made  or 
foreign  securities  purchased,  interest  payable,  expenditure  of  its 
nationals  abroad  or  remittances  of  its  residents  to  other  countries, 
and  accounts  payable  for  sundry  services.  The  securities  pur- 
chased abroad  may  be  foreign  issues  or  foreign-held  native  securi- 
ties resold  or  matured.  All  these  factors  which  create  a  dem,and 
for  foreign  exchange  raise  foreign  rates  on  the  market  of  the 
country  or  depress  its  own  rate  on  the  foreign  markets. 

A  supply  of  foreign  exchange  is  created  not  only  by  exports  of; 
goods  but  also  by  invisible  credits,  as  borrowings  by  a  countn, 
sales  of  native  securities  or  holdings  of  foreign  Issues,  interest  re- 
ceivable from  abroad,  expenditures  of  foreigners  within  the  country, 
or  remittances  to  it  from  abroad,  and  accounts  receivable  for  sundry 
services. 


PRINCIPLES   AND   PRACTICE   IN   THE    WORLD   WAR  295 


u.  The  Trade  Balance  of  the  United  States 

Except  in  time  of  war,  most  countries  do  not  keep  a  record 
of  all  the  debits  and  credits  which  determine  the  international 
balance.  As  a  rule,  official  records  only  of  commodity  exports  and 
imports  and  of  gold  are  available. - 

Attempts  have  been  made  to  obtain  the  total  debits  and  credits 

in  the  trade  balance  of  the  United  States.    For  instance,  Sir  George 

Paish,  attempted  to  strike  such  a  balance  for  the  year  1 908-1 909. 

He  estimated  that  $6,000  million  of  United  States  securities  were 

held  abroad,  as  follows: 

T^Iillion 
dollars 

By  Great  Britain 3500 

France 500 

Germany 1000 

Netherlands 750 

Belgium,  Switzerland,  etc 250 

Total 6000 

In  addition,  he  estimated  that  the  floating  debt,  drafts  in  antici- 
pation of  exports,  amounted  to  $500  million.  On  this  investment 
of  $6,500  million  he  assumed  an  annual  interest  debit  of  $325 
million.  Investments  by  the  United  States  in  Cuba  and  Mexico 
and*  elsewhere,  aggregated  $1,500  million,  interest  on  which  was 
$75  million.  On  the  net  investment  of  $5,000  million,  the  net 
annual  interest  payable  was  $250  million.  The  other  debits  cal- 
culated by  Paish  were — 

Million 
dollars 

Tourist  expenses 175 

Remittances  to  friends  through  banks,  express 

or  postal  money  order 150 

Freights,   less   coal  and  supplies  bought  in 
United  States 25 

Total 350 

Emigrants  and  tourists  took  $60  million  out  of  the  country  and 
immigrants  brought  about  the  same  sum  into  the  country.     Debits 

*  Paish,  Sir  George,  The  Trade  Balance  of  the  United  States.  Report 
of  the  National  Monetary  Commission,  Doc.  579.  Washington:  Govern- 
ment Printing  Office,  1910. 


296        INTERNATIONAL    FIN/ NCE    AND    ITS    REORGANIZATION 

on  account  of  foreign  fire  and  marine  insurance  were  approximately 
offset  by  credits  arising  from  life  insurance  by  American  companies 
abroad.  The  total  invisible  balance  was  therefore  $6oo  million 
approximately.^ 


iii.  History  of  the  Trade  Balance  of  the  United  Stated 

(a)  Resume — 

The  history  of  the  trade  of  the  United  States  illustrates  the 
effects  of  the  flow  of  capital  into  a  country  and  of  the  subsequent 
payments  of  interest  thereon.  In  the  earliest  period  of  American 
history  there  was  an  excess  of  imports  which  was  offset  by  the 
profits  of  the  extensive  merchant  marine  of  the  United  States. 
In  the  period  from  1 821  to  1837  capital  was  attracted  to  the 
United  States  and  as  a  result  the  excess  of  imports  increased.  In 
the  interval  from  1838  to  1849  an  excess  of  exports  gradually 
arose  to  pay  interest  on  the  capital  that  had  previously  been  In- 
vested in  the  United  States.  In  the  period  from  1850  to  1873  an 
excess  of  im^ports  again  appeared  due  to  the  inflow  of  foreign  capital 
which  developed  our  railroads  and  built  up  the  west.  In  the 
period  from  1874  to  1895  an  excess  of  exports  developed  due  in 
part  to  the  lessened  inflow  of  capital  resulting  from  the  default 
by  many  states  on  their  securities.  Another  factor  was  the  growth 
of  interest  charges  on  the  foreign  indebtedness  and  the  repayment 
of  maturing  loans.  In  the  period  from  1896  to  1914,  the  excess  of 
exports  increased.  A  large  factor  was  the  outflow  of  funds  from 
the  United  States  in  payment  of  expenditures  of  Americans  travel- 
ing or  living  abroad  and  the  increasing  volume  of  remittances  of 
immigrants  to  their  friends  and  relatives  in  Europe,  as  well  as  the 
withdrawal  of  the  savings  of  immigrants  who  returned  to  their 
native  lands.  The  period  of  the  war  was  characterized  by  a  huge 
excess  of  exports  due  chiefly  to  the  outflow  of  capital  from  the 
United  States. 


*Paish,  George,  ihid.,  pp.  175-195. 

^Bullock,  Chas.  J.,  Williams,  John  H.,  and  Tucker,  Rufus  S.,  "Balance 
of  Trade  of  the  United  States,"  Harvard  Review  of  Economic  Statistics, 
April,  1920.,  See  also  Paish,  ibid.^  pages  195  et  seq. 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 
The  Statistical  resume  is  given  herewith: 


297 


Average  Annual  Balance  of  Trade  of  the  United  States 

By  periods  from  1821  to  1918 

(in  million  dollars) 


Fiscal  year 

Exports 

Imports 

Excess 
exports 

Excess 
imports 

1821-1837 

82 

93 

II 

1838-1849 

116 

113 

3 

1850-1873 

274 

338 

64 

1874-1895 

783 

670 

113 

1896-1914 

1691 

1204 

487 

1915-1918 

4908 

241 1 

2497 

(b)  The  Pre-War  Period— 

The  statistics  for  the  period  from  1896  to  19 14  as  computed 
by  Bullock  and  his  associates  correspond  closely  to  the  figures  of 
Sir  George  Paish  in  total,  but  differ  slightly  in  the  individual  items. 
Bullock  gives  the  annual  net  interest  payable  as  $160  million, 
Paish  sets  it  at  $250  million.  Both  give  tourist  expenditures  as 
$170  million,  and  immigrants'  remittances  as  $150  million.  Net 
freight  charges  according  to  Bullock  were  $34  million  and  to 
Paish  $25  million.  Net  imports  of  gold  according  to  Bullock  were 
$9  million;  Paish  omits  this  item.  Insurance  premiums,  commis- 
sions and  miscellaneous  items  according  to  Bullock  were  $30 
million ;  Paish  offsets  the  Am.erican  payments  to  foreign  companies 
for  fire  and  marine  insurance  by  foreign  payments  to  American  com- 
panies for  life  insurance.  Finally,  Paish  includes  an  item  which 
does  not  figure  in  Bullock's  calculation,  namely  the  funds  taken  by 
emigrants  and  the  funds  brought  in  by  immigrants  which  offset 
each  other  and  vary  from  $50  to  $60  million  per  annum.  Bullock 
deducts  from  these  debits  net  capital  borrowings  from  abroad 
estimated  at  $53  million  yearly.  The  net  invisible  debit  balance 
according  to  Bullock  was  about  $500  million  and  according  to 
Paish  $600  million,  with  a  fluctuation  downward  of  $100  million 
in  years  of  depression. 


298 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


Average  Antojal  Balance  of  International  Accounts  of  the  United 
States  "  in  the  Period  1896  to  1914 

(in  million  doUars) 


Items 

Credits: 

Excess  of  exports  of  merchandise  and  silver 
Net  borrowings  of  foreign  capital 

Total 

Debits: 

Net  interest  payable  abroad 

Tourist  expenditures 

Immigrants'  remittances 

Net  freight  charges 

Net  gold  imports 

Insurance  premiums,  commissions,  etc 

Total 


Amoimts 


487 
53 


540 

160 
170 
ISO 

34 
9 

30 


553 


(c)   The  War  Period— 

The  period  of  the  war,  approximately  July  I,  1914,  to  De- 
cember 31,  19 1 8,  showed  a  trade  balance  which  was  very  different 
from  that  of  the  pre-war  period,  and  in  fact  represented  a  stage  in 
the  development  of  the  United  States  which  might  have  taken 
several  decades  to  attain.  The  chief  factor  that  characterized  the 
period  was  an  enormous  outflow  of  capital  in  the  form  of  loans  by 
individuals  and  by  the  United  States  Government.  Another  factor 
was  the  return  and  repayment  of  American  securities  sold  to 
Europe.  Finally,  imports  of  gold  were  in  unprecedented  volume 
as  compared  with  former  years,  though  relatively  small  compared 
with  the  two  items,  loans  to  Europe  and  American  securities  re- 
turned. These  three  large  credits  offset  and  made  possible  a  volume 
of  exports  without  parallel  in  history.  Other  factors  are  of  interest 
but  of  less  significance. 


'Bullock,  ibid.,  pp.  228-232. 


PRINCIPLES    AND   PRACTICE    IN   THE   WORLD   WAR 


299 


Net  Bal\nce  of  International  Accounts  of  the  United  States  <>  for 
THE  Period  Jcxy  i,  1914,  to  December  31,  1918 

(in  million  doUars) 


Items 

Credits: 

Excess  of  exports  of  merchandise  and  silver . 
Net  interest  payments  receivable 

Totfil 

Debits: 

Net  imports  of  gold 

American  securities  returned 

Public  and  private  loans  to  foreign  countries 

Net  freight  charges 

Payments  for  chartering  foreign  vessels 

Immigrants'  remittances 

Total 

Net  debit 


Amounts 


11,808 
650 


12,458 

1,029 
2,000 
8,040 

165 
261 

600 

12,895 
437 


(d)    The  Outlook— 

In  comparing  the  pre-war  period  with  the  war  period  the  im- 
portant change  in  the  invisible  balance  of  trade  of  the  United 
States  is  that  the  item,  net  interest  payments,  which  constituted 
a  debit  of  $160  million  before  the  war,  has  become  a  credit  of 
$525  million  after  the  war,  that  is  assuming  that  the  inter-Allied 
loans  will  not  be  repudiated  or  canceled.  A  less  significant  change 
is  the  reduction  of  our  annual  debit  on  account  of  freight  payments 
from  $34  million  to  a  considerably  smaller  figure  or  perhaps  even 
to  a  net  credit,  depending  on  the  final  status  of  our  merchant 
marine.  As  the  result  of  these  two  changes  a  total  net  debit  of 
$525  million  before  the  war  has  been  changed  to  a  total  net  credit 
of  $195  million.  Before  the  war  our  net  invisible  debit  was 
liquidated  by  an  excess  of  exports.  On  the  assumption  that  our 
inter-Allied  loans  will  stand,  our  net  invisible  credit  ought  ulti- 
mately to  be  balanced  by  a  net  excess  of  imports.  However,  if  the 
inter-Allied  loans  are  canceled,  repudiated,  or  even  suspended,  our 
merchandise  balance  will  probably  for  a  long  time  to  come  show  a 
net  excess  over  pre-war  figures. 


•Bullock,  ibid. 


300        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


iv.  Arbitrage'^ 

A  brief  explanation  of  arbitrage  will  enable  the  reader  to  follow 
one  of  the  anomalous  and  very  puzzling  financial  phenomena  of 
the  war — the  depreciation  of  the  dollar  on  the  neutral  markets  of 
Europe,  in  spite  of  a  large  excess  of  exports  from  the  United 
States  to  these  countries. 

Although  most  of  the  world's  trade  before  the  war  was  trans- 
acted with  sterling  exchange,  the  other  currencies  were  quoted  in 
the  principal  trading  centers  of  the  world.  Usually,  bills  on  any 
particular  country  were  quoted  at  the  same  percentage  of  its  gold 
parity  on  several  markets.  If,  however,  a  currency  was  quoted  at 
unequal  rates  on  several  markets,  foreign  exchange  dealers  would 
buy  the  currency  in  the  cheaper  market  thus  raising  the  rate  and 
sell  it  in  the  dearer  one,  thus  depressing  the  rate  until  the  differ- 
ences were  eliminated.  Arbitrage  is  the  process  of  eliminating 
the  differences  in  quotations  of  exchange  rates  of  a  country  on 
several  markets,  or  of  equalizing  the  quotations  on  all  markets. 

As  evidence  of  the  equalization  of  the  exchange  rates  on  two 
or  more  markets,  the  following  tables  are  presented.  The 
London  rates  on  Paris  and  the  Paris  rates  on  London  are  either 
identical  or  nearly  so : 

Exchange  Rates  on  United  Kingdom,  France  and  Italy  * 


End  of  month,  1919 


*London  on 

Paris, 

fr.  per  £ 


Paris  on 

London, 
fr.  per  £ 


London  on  I     Italy  on 


Italy, 
lire  per  £ 


London, 
lire  per  £ 


January. . 
February. 
March .  . . 
April .... 

May 

June 

July 

August . . . 
September 
October .  . 
November 
December . 


25  98 
25.98 


40 


*London  quotations  are  cable  averages  from  Thursday  of  the  last 
week  of  the  month  as  quoted  by  the  London  Economist.  Foreign  quota- 
tions on  London  are  averages  for  the  particular  date  quoted  by  the 
Economist  for  the  last  week  of  the  month. 

'Schmidt,  F.,  Arbitrage  und  Wechselkurse,  Schmollers  Jahrbuch,  1919, 
xliii,  pp.  203-262. 

*  Federal  Reserve  Bulletin,  March,  1920. 


PRINCIPLES   AND   PRACTICE   IN   THE   W'ORLD   WAR 


301 


During  most  of  the  year  the  quotations  correspond  closely. 
The  unusually  wide  variations  are  due  to  the  violent  fluctuations 
of  the  exchange  rates,  resulting  from  the  abandonment  of  their 
stabilization,  and  the  fact  that  quotations  do  not  cover  identical 
days. 

Perhaps  a  clearer  evidence  of  the  effects  of  arbitrage  in  equaliz- 
ing exchange  rates  throughout  the  world  may  be  had  from  a  com- 
parison of  sterling  rates  in  New  York  with  the  relative  rates  of 
both  sterling  and  dollars  on  a  third  market,  Copenhagen.  The 
rates  are  the  high  quotations  for  the  months  and  show  a  fair  cor- 
respondence from  1 91 5  onwards.  The  1914  quotations  show  dis- 
crepancies due  to  the  erratic  fluctuations  in  the  early  months  of 
the  war. 

The  Effect  of  Arbitil\ge  on  Sterling  and  Dollars 
Based  on  gold  parity  as  100 


Month 

High  Rates  in  Copenhagen  * 

High  rates 
in 

On  London 

On  New  York 

Ratio 

New  York  f 
on  London 

1914 

Tuly 

(a) 
100.93 
105.72 

100.00 
98-56 

94.16 
97.08 

90,91 
84.80 

84.58 
98-34 

108.97 
109.69 

(b) 
100.67 

107.77 

103.22 
101.61 

95-98 
100.00 

93-57 
87.94 

87-13 
100.80 

114.48 
132-44 

(a)  :  (b) 
100.3 
97-1 

96.8 
97.0 

98.1 
97.1 

97-1 
96-5 

97-1 
97-4 

95-2 
82.9 

113.02 
100.53 

98-34 
97-43 

97-79 
97-75 

97.72 
97.66 

97-71 
97.78 

95-24 
85 -53 

December 

1915 
June 

December 

1916 

Tune 

December 

1917 

June 

December 

1918 
June 

December 

1919 

June 

November 

*Federal  Reserve  Bulletin,  January,  1920,  p.  44. 

tFederal  Reserve  Bulletin,  September,  1918,  p.  837,  and  January,  1920, 
p.  49. 


302 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


As  final  evidence  of  the  effects  of  arbitrage  In  equalizing  ex- 
change rates  we  give  herewith  the  rates  for  Swedish  kroner  on 
Basle  and  then  for  comparison  the  rates  on  both  the  Basle  and 
Stockholm  markets  of  sterling,  franc,  dollar,  and  mark  bills.  The 
ratio  of  the  rates  on  the  Swiss  market  to  rates  on  the  Swedish 
market  of  bills  in  the  four  currencies  corresponds  very  closely  to 
the  Swiss  quotations  for  Swedish  kroners. 


The  Effect  of  Arbitrage  on  Swiss  Francs  and  S^\t:dish  Kroners  ' 
Based  on  a  gold  parity  as  loo 


Currency  and  Market 

July, 
1914 

Jan., 
191S 

July, 
1915 

Jan., 
1916 

July, 
1916 

Jan-, 
1917 

July, 
1917 

Dec-, 
1917 

Swedish  kroner  on  Basle. . . 

99-37 

99.  So 
100.50 

100.03 
100.74 

99-18 
ICO. So 

99-36 
100.13 

95-22 

101.70 
106.17 

102.13 
107.62 

102.07 
107 . 23 

93-33 
98-32 

100.08 

101.62 
100.99 

95.00 
95-78 

103 .  62 
103.22 

88.29 
88. 3S 

102.60 

98.33 
95-10 

83.85 
86.17 

100.34 
97-32 

77-25 
76-17 

109.08 

100.07 
92.13 

89-75 
82.7s 

102.27 
94-93 
76.60 
71-49 

106.60 

94.88 
88. 89 

85. 10 
80.94 

97.06 
91-53 

68.53 
64.14 

108.04 

85-84 
83-70 

7900 
77-35 

88.37 
86.03 

51-43 
51-25 

106.92 

82.75 
76.93 

76.70 
71-76 

84.32 
79-60 

69.46 
60.6s 

Sterling  on  Stockholm 

Francs  on  Stockholm 

Dollars  on  Stockholm 

Marks  on  Stockholm 

It  is  remarkable  that  with  the  varying  rates  of  decline  of  mark, 
franc,  sterling  and  dollar  exchange  the  relative  position  of  the 
Swiss  francs  and  Swedish  kroner  should  have  been  maintained 
alike  on  all  markets.^" 

Before  the  war  the  differences  between  the  relative  levels  of 
any  currency  on  two  foreign  markets  was  very  slight.  During  the 
war  the  "pegging"  of  the  Allied  exchanges  resulted  in  the  establish- 
ment of  different  levels  for  the  same  currency  in  the  "pegged"  New 
York  market  and  in  the  free  neutral  markets.  As  a  result  of 
arbitrage  transactions  the  "pegged"  currency,  sterling,  franc  or  lira, 
was  bought  in  the  free  neutral  markets  where  it  fell  to  its  natural 
level  and  sold  in  the  "pegged"  New  York  market  where  it  was 
maintained  at  an  artificially  high  level.    As  a  result  of  this  selling 

^  Swedish  rates  compiled  from  Kommersiella  Middelanden,  January 
15,  1918,  in  Federal  Reserve  Bulletin,  May,  1918,  p.  380.  Swiss  rates 
compiled  from  the  Swiss  Bankvereins'  Revue  Economique  et  Financiere, 
1914-1917,  in  Federal  Reserve  Bulletin,  Ma}-,  1918,  p.  391. 

'"The  British  Board  of  Trade  Journal  of  January  8,  1920,  and  sub- 
sequent dates  gave  the  foreign  exchange  rates  of  several  of  the  leading 
countries  on  London,  Paris  and  New  York.  These  were  calculated  in 
percentage  of  gold  parity  and  indicate  the  close  correspondence  in  tKo 
relative  rates  as  the  result  of  arbitrage  transactions. 


PRINCIPLES    AND   PRACTICE    IN   THE    WORLD   WAR  303 

pressure  on  New  York,  dollar  exchange  declined  on  the  neutral 
markets  in  sympathy  with  the  Allied  exchanges  which  it  supported. 
To  correct  this  condition  several  merchants  and  one  member  of 
the  Senate  urged  the  prohibition  of  arbitrage.  However,  the  effect 
would  have  been  detrimental  to  Allied  military  success  and  the 
proposal  was  not  adopted. 

As  the  result  of  the  release  of  the  "peg,"  or  the  abandonment 
of  the  stabilization  of  the  Allied  exchanges,  the  differences  in  the 
exchange  rates  of  sterling,  for  instance,  on  the  Zurich  and  New 
York  markets  were  eliminated.  Arbitrage  again  operated  to 
equalize  the  relative  levels  of  the  currencies  on  all  markets. 
British,  French  and  Belgian  exchange  declined  in  New  York  to 
the  levels  they  maintained  in  the  neutral  markets.  The  dollar, 
on  the  other  hand,  rose  on  all  markets. 

v.  Correctives^'^ — The  consideration  of  the  correctives  of 
the  foreign  exchanges  may  be  reduced  to  two  cases  (a)  if  gold  flows 
freely  and  (b)  if  gold  does  not  flow.  The  first  case  may  be  sub- 
divided further  into  two  cases,  ( i )  where  the  countries  involved 
are  on  a  gold  basis,  and  (2)  where  the  countries  involved  are  on  a 
paper  basis. 

(a)  Between  Countries  on  a  Gold  Basis — 

Between  countries  on  a  gold  basis,  with  gold  flowing  freely 
exchange  rates  can  fluctuate  only  betv.-een  narrow  limits,  namely, 
the  upper  and  lower  gold  points.  A  country  with  an  excess  of 
exports  may  have  more  bills  for  sale  than  it  needs  for  the  settle- 
ments of  all  its  debits.  This  surplus  w^ill  depress  the  exchange  rates 
of  foreign  countries  in  its  market.  On  the  other  hand  foreign 
countries  will  have  insufficient  bills  on  this  exporting  country  and 
the  rates  for  its  bills  will  therefore  rise.  When  the  rise  above  gold 
parity  exceeds  the  cost  of  packing,  insuring  and  shipping  gold,  mer- 
chants will  prefer  to  ship  gold,  and  thus  limit  the  rise  m  exchange. 
How  does  the  gold  shipment  correct  the  appreciated  exchange? 

I.  Changes  in  the  gold  supply — When  in  payment  for  an 
excess  of  exports  a  country  receives  gold,  prices  tend  to  rise  because 
of  the  increased  quantity  of  gold.    Foreign  purchases  in  this  country 

"Further  discussion  may  be  found  in  Goschen,  Theory  of  the  Foreign 
Exchanges,  pp.  60,  63,  70,  71,  74,  78.  Also  Brown,  H.  G.,  Principles  of 
Commerce,  pp.  142-151. 


304        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

then  tend  to  cease  and  thus  its  exports  decline.  Simultaneously  and 
as  a  result  of  high  prices  imports  increase.  When  in  settlement 
of  an  excess  of  imports  a  country  must  ship  gold,  prices  tend  to  fall 
as  a  result  of  the  diminished  supply  of  gold.  Imports  by  this  country 
then  tend  to  decline,  and  exports  tend  to  increase,  thus  eliminating 
its  excess  of  imports.  A  flow  of  gold  between  the  two  countries 
changes  their  relative  price  levels  and  tends  to  correct  the  condition 
that  caused  the  flow. 

2.  Changes  in  rates — Fluctuations  of  exchange  rates  in  gold 
countries  are  self-correctives.  If  sterling  sells  for  $4.91  in  New^ 
York  owing  to  a  scarcity  of  bills  on  London,  the  increased  pur- 
chasing power  of  sterling  induces  British  merchants  to  buy  in 
New  York  and  thus  create  a  supply  of  the  needed  sterling  ex- 
change. Simultaneously  American  merchants  reduce  purchases  in 
Great  Britain  and  thus  decrease  the  demand  for  sterling.  Similarly, 
if  sterling  sells  for  $4.81  in  New  York,  owing  to  an  excess  of  bills 
on  London,  the  lower  cost  of  sterling  induces  Americans  to  buy 
goods  in  England  and  thus  create  a  demand  for  sterling  bills. 
Simultaneously  British  merchants  reduce  purchases  in  the  United 
States  and  thus  decrease  the  supply  of  sterling  bills.  Therefore  an 
excess  of  exports,  raising  exchange  rates,  raises  prices  to  the 
foreigner,  and  thus  tends  to  check  exports.  An  excess  of  imports, 
lowering  exchange  rates,  raises  the  price  of  foreign  goods,  and  thus 
tends  to  check  imports. 

3.  Changes  in  the  volume  of  goods — A  growing  excess 
of  exports  tends  to  create  a  shortage  of  goods  in  the  exporting 
country  and  thus  tends  to  check  exports.  A  growing  excess  of 
imports  tends  to  create  a  surplus  of  goods  and  thus  tends  to  check 
imports. 

Therefore  a  flow  of  trade  in  one  direction  tends  to  correct 
itself  through  a  change  in  the  price  level  which  is  brought  about  by 
a  change  either  in  the  volume  of  gold,  in  the  exchange  rates,  or  in 
the  volume  of  goods. 

(b)  Betiveen  Countries  on  a  Non-Gold  Basis,  If  Gold  Flows^^ — 
If  gold  is  free  to  move,  a  country  on  a  paper  basis  or  on  a 

'^  For  further  discussion  see  papers,  "International  Trade  Under  De- 
preciated Paper,"  by  F.  W.  Taussig  and  Jacob  H.  Hollander,  May,  1917, 
and  August,  1918,  Quarterly  Journal  of  Economics. 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR  30$ 

silver  basis  reacts  in  a  way  similar  to  countries  on  a  gold  basis. 
The  rate  of  exchange  in  the  paper  or  silver  country  on  gold  coun- 
tries depends  on  the  cost  of  gold  in  terms  of  paper  or  silver.  Its 
exchange  rates  rise  as  its  paper  or  its  silver  depreciates  in  relation 
to  gold.  Its  exchange  rates  fall  as  its  paper  or  its  silver  appreciates 
in  relation  to  gold.  On  the  other  hand,  the  rate  of  exchange  in  the 
gold  countries  on  the  paper  or  silver  country  depends  on  the  cost 
in  gold  of  the  paper  or  silver  money.  As  the  paper  or  silver  de- 
preciates, exchange  on  the  paper  or  silver  country  falls.  As  paper 
or  silver  appreciates,  exchange  on  the  paper  or  silver  country  rises. 
In  the  paper  or  silver  country  the  upper  limit  of  exchange  on  the 
gold  country  cannot  exceed  the  paper  or  silver  cost  of  gold  plus 
the  cost  of  shipping  it,  provided  the  premium  is  regularly  established 
and  is  not  artificially  restricted. 

In  a  country  with  inconvertible  paper  currency  gold  tends  to 
lose  its  character  as  a  circulating  medium,  and  to  become  merchan- 
dise and  to  react  like  other  commodities.  Therefore  when  there 
is  an  excessive  issue  of  paper  all  prices  rise,  including  the  price  of 
gold.  But  gold  is  purchasable  and  exportable  like  any  other 
commodity.    How  do  the  correctives  of  exchange  operate? 

1.  Changes  in  gold  supply — The  outflov/  of  gold  from  a 
paper  country  tends  to  make  gold  dear  in  relation  to  other  goods. 
Paper  prices  rise  because  of  the  decreasing  likelihood  of  redemption. 
But  gold  prices  fall,  just  as  in  a  country  on  a  gold  basis.  There- 
fore exports  increase,  imports  decrease  and  as  a  result  gold  flows 
back  to  the  paper-standard  country.  Thus,  although  the  fluctua- 
tions are  wider  under  a  regime  of  inconvertible  paper,  a  gold  flow 
operates  to  correct  the  exchanges  in  a  paper-standard  country,  in 
the  same  way  as  in  a  gold-standard  country. 

2.  Changes  in  rates — In  a  country  on  a  paper  basis  the 
extremes  of  fluctuation  are  determined  by  the  cost  of  shipping  gold, 
which  in  turn  depends  upon  the  depreciation  of  the  paper.  The 
fluctuations  in  exchange  rates  of  a  non-gold  standard  country 
make  more  or  less  profitable  the  purchase  of  goods  within  it,  and 
these  fluctuations  tend  to  act  as  correctives  of  the  trade  conditions 
which  caused  them. 

The  limits  of  fluctuation  in  foreign  exchange  rates  of  the 
paper  country  will  be  the  cost  of  shipping  gold  plus  the  extent  of 


3o6        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  premium  on  gold,  provided  the  premium  is  regularly  estab- 
lished and  provided  gold  flows  freely. 

3.  Changes  in  the  volume  of  goods — The  surplus  or 
scarcity  of  goods  tends  to  correct  itself.  If  a  paper-standard 
country  imports  heavily,  the  larger  supply  of  goods  in  relation  to 
paper  and  to  gold  tends  to  make  prices  lower  in  either  paper  or 
gold.  In  the  exporting  country  on  a  paper  basis  the  relative 
scarcity  of  goods  tends  to  make  prices  higher,  measured  either  in 
paper  or  gold.  For  this  reason  more  goods  will  be  bought  with  gold 
in  the  countrj-  having  an  excess  of  imports  and  goods  therefore  tend 
to  flow  out  of  the  country. 

Excess  buying  by  a  paper  country  in  another  would  be  cor- 
rected by  the  flow  of  goods,  by  the  effect  of  that  flow  on  prices  in 
the  two  countries,  and  by  the  relation  of  goods  to  gold,  as  indicated 
in  the  case  of  two  countries  on  a  gold  basis. 

(c)  Between  Countries  on  a  Non-Gold  Basis  If  Gold  Dees  Not 
Floiv — 

If  a  country  has  little  or  no  gold  or  if  the  exportation  of  gold 
is  prohibited,  the  fluctuations  in  exchange  rates  are  much  wider 
than  in  the  case  noted  above,  for  the  limits  set  by  the  gold  points 
are  removed.  This  is  the  condition  in  most  of  the  countries  of 
Europe  to-da}'.  Since  gold  cannot  be  had  for  paper,  since  it  is 
illegal  to  pay  a  premium,  and  since  the  gold  bullion  is  in  the 
control  of  the  central  banks,  gold  does  not  flow  and  exchange  rates 
fluctuate  violently.  When  gold  does  not  flow  and  when  there  is 
no  recognized  prem.ium  on  paper  the  relative  value  of  paper  to  gold 
has  no  significance  in  determining  exchange  rates.  The  sole  deter- 
minants of  the  rates  of  exchange  then  are  the  supply  of  and  demand 
for  bills.  If  the  demand  for  bills  exceeds  the  supply,  the  country 
cannot  effect  a  settlement  except  by  reducing  its  imports  or  in- 
creasing its  exports. 

Countries  with  inconvertible  paper  standards  usually  have  an 
excess  of  imports.  A  paper  regime  usually  follows  a  period  of 
heavj'  foreign  borrowing  and  of  an  excess  of  imports  such  as  pre- 
vailed in  the  belligerent  countries  of  Europe  during  the  World 
War.  During  a  further  period  of  an  excess  of  imports,  the  ex- 
portation of  gold  must  be  prohibited,  otherwise  the  supply  would 
be  drained.    When  conditions  improve  so  that  credits  exceed  debits 


PRINCIPLES   AND  PRACTICE  IN  THE  WORLD  WAR  307 

and  gold  flows  into  the  country,  the  prohibition  on  the  exporta- 
tion of  gold  may  be  removed. 

Is  it  to  be  assumed  then  that  there  are  no  limits  to  the  fluctua- 
tions in  exchange  rates  of  a  country  on  an  inconvertible  paper 
basis?  In  the  absence  of  a  flow  of  gold  the  two  other  correctives 
mentioned  above  still  apply.  However  they  are  not  so  sensitive. 
Under  conditions  of  the  free  flow  of  gold,  fluctuations  must  be 
narrow  because  gold  is  universally  current;  because  it  is  compact 
and  because  the  cost  of  shipping  it  is  low,  in  normal  times  perhaps 
I  per  cent  of  its  value. 

1.  Changes  in  volume  of  goods — A  tendency  to  a  surplus 
of  goods  in  the  importing  country  and  a  scarcity  of  goods  in  the 
exporting  country  tends  to  correct  a  flow  of  com.modities  in  one 
direction.  Therefore  the  fluctuations  of  exchange  rates  are  not 
utterly  without  limit.  However,  these  limits  are  very  wide,  for 
several  reasons.  Commodities  are  not  so  universally  current  as  gold. 
Only  such  commodities  are  imported  as  are  wanted,  only  such  are 
exported  as  are  available.  Again  the  cost  of  shipping  commodities 
is  greater,  relative  to  price  than  of  shipping  gold,  and  depends 
on  the  character  and  the  bulk.  The  period  following  the  World 
War  will  therefore  be  characterized  by  very  wide  fluctuations  of 
the  exchanges  of  countries  with  an  inconvertible  paper  standard, 
but  these  fluctuations  will  not  be  unlimited. 

The  shortage  and  glut  of  goods  will  affect  the  relative  price 
levels  or  barter  levels  between  importing  and  exporting  countries, 
so  that  a  strong  flow  of  trade  in  one  direction  will  tend  to  correct 
itself. 

2.  Changes  in  rates — The  relative  price  levels  will  also  be 
affected  more  directly  by  variations  in  exchange  rates,  as  in  the  case 
of  gold  standard  countries  explained  above. 

(d)  Summary — 

Exchange  rates  between  countries  on  a  gold  basis  are  corrected 
by  a  flow  of  gold.  The  exchange  rates  respond  immediately  and 
fluctuations  are  kept  within  narrow  limits.  Less  immediate  cor- 
rectives are  changes  in  the  rates  themselves  or  in  the  relative  price 
levels  and  changes  in  the  relative  abundance  or  scarcity  of  goods. 

Between  countries  on  a  paper  basis  which  do  not  restrict  the 
free  flow  of  gold  the  same  principles  apply,  except  that  the  gold 
points  which  restrict  the  fluctuations  of  the  paper  exchanges  depend 


3o8        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


upon  the  paper  premium.  That  is,  the  extreme  fluctuation  of 
the  paper  exchanges  equals  the  cost  of  gold  in  terms  of  paper  plus 
the  cost  of  shipping  gold.  The  same  reasoning  applies  to  a 
country  with  a  silver  standard. 

If  the  movement  of  specie  is  prohibited,  the  gold  points  are  re- 
moved, and  fluctuations  are  more  violent.  The  sole  control  is  the 
tendency  of  a  flow  of  trade  in  one  direction  to  check  itself  and  to 
induce  a  reverse  flow,  either  as  a  result  of  the  relative  scarcity  or 
abundance  of  goods  or  more  directly  as  the  result  of  the  changes  in 
price  levels  which  follow  variations  in  exchange  rates, 

B.  Quotations 

The  course  of  the  several  exchange  rates  before  the  war  may 
best  be  studied  on  the  London  market,  because  all  the  important 
currencies  were  quoted  there  and  London  vv^as  a  free  gold  market. 
A  study  of  exchange  rates  during  and  after  the  World  War  must 
be  based  on  New  York  quotations,  because,  except  during  the 
period  from  October,  191 7,  to  June,  191 9,  New  York  constituted 
a  free  gold  market.  Therefore  depreciation  of  exchange  rates  in 
New  York  measured  the  discount  on  paper  money. 

The  highest  records  for  the  exchange  rates  of  the  belligerents 

since  the  beginning  of  the  war  were  reached  in  August,  191 4,  when 

Europe   recalled   its  funds  from   foreign   countries.     The   highest 

records   for  the  neutrals  were  attained  during  the  period  when 

sterling  was  pegged  in  New  York,  and  before  measures  to  reduce 

the   premium   were   effected.     The   lowest   figures  since  August, 

19 1 4,  alike  for  both  belligerents  and  neutrals  were  quoted  during 

and  after  1 920. 

High  and  Low  Exchange  Rate  est  New  York  from  August  i,  19 14,  to 
December  31,  1920     


Currency 

Sterling 

Francs 

Lire 

Marks 

Kronen  (Austrian) 

Guilders 

Francs  (Swiss) .  .  . 

Pesetas 

Kroner  (Swedish). 
Kroner  (Danish).. 


Parity 

High 

Low 

$4.8665 

$7.0000 

$3.1800 

•  1930 

-3312 

•  0570 

.1930 

.2500 

•  0330 

.2382 

.2750 

.0101 

.2026 

.2300 

.0020 

.4020 

•5237 

.2900 

■1930 

•  2597 

•1505 

.1930 

.3000 

.1183 

.2680 

.4700 

.1630 

.2680 

.3900 

•130S 

Date  of  high 


Date  of  low 


Aug.  4,  1914 
Aug.  4,  1914 
Aug.  4,  1914 

Aug.  4,  1914 
Aug.  4,  1914 

Aug.  9.  1918 
May  20,  19 1 8 
April  17,  1918 
Nov.  2,  1917 
Oct.    27,  191 7 


Feb.  4,  1920 
Nov.  II,  1920 
Nov.  8,  1920 

Jan.  28,  1920 
Dec.  17,  1920 

Nov.  6, 1920 
Nov.  8,  1920 
Nov.  13,  1920 
Feb.  4,  1920 
Nov.  8,  1920 


PRINCIPLES   AKD  PRACTICE    IN   THE   WORLD   WAR  309 

Corresponding  to  the  lowest  quotation  for  sterling  exchange  in 
New  York,  the  price  for  gold  bullion  in  London  rose  to  the 
highest  record  on  February  5,  1920,  and  was  quoted  at  127s.  4d, 
compared  to  parit)^  of  85s.  per  ounce. 

The  quotations  following  are  expressed  not  absolutely  in  terms 
of  currency  but  relatively  in  terms  of  gold  parity,  which  will  be 
taken  as  lOO  throughout.  This  method  of  quotation  is  not  new  in 
the  countries  of  the  Latin  Monetary  Union,  where  depreciated 
exchanges  are  always  under  100  and  appreciated  rates  always  over 
100.  Should  a  world  monetary  unit  eventually  be  established  all 
quotations  being  based  on  100  as  gold  parity  would  read  as  the 
relative  quotations  in  the  tables  given  below. 

i.  Neiu  York  Rates  on  Allied  Pozvers  in  the  World  War 

(a)  From  August,  1914,  to  April,  1917 — 

At  the  outbreak  of  the  war  exchange  rates  fluctuated  violently. 
Sterling  reached  $7.00  in  August,  declined  to  about  $5.00  in  Oc- 
tober, touched  parity  in  December,  and  by  Septem.ber,  1915,  had 
gone  down  to  $4.50.  Europe  recalled  the  short-term  funds  which 
had  been  loaned  in  the  New  York  market.  This  caused  a  demand 
in  New  York  for  exchange  on  London,  Paris  and  Milan  and  as  a 
result  for  some  months  after  the  outbreak  of  the  war  these  ex- 
changes ruled  above  par.  However,  with  the  increase  of  exports 
from  the  United  States  to  Europe  these  three  exchanges  began 
to  decline  on  the  New  York  market,  but  were  stabilized  by  Great 
Britain  through  the  resale  of  American  securities  distributed  in 
Europe,  the  floating  of  loans,  both  secured  and  unsecured,  in  New 
York,  and  the  sale  of  British  treasury  bills.  New  York  rates  for 
sterling  fluctuated  relatively  little  during  this  period  although  the 
difficulty  of  financing  became  increasingly  severe  during  the  winter 
of  1916-1917.  The  rate  was  maintained  at  about  $4.76,  or  at  97.9 
per  cent  of  parity.  French  francs  declined  far  more  than  did 
sterling.  The  decline  was  very  gradual,  from  19.3  cents,  or  parity, 
maintained  in  January  and  February,  1 91 5,  down  to  17.1  cents,  or 
88.7  per  cent  of  parity,  in  the  winter  of  1916-1917.  Lira  rates 
declined  more  than  either  of  the  others.  They  can  hardly  be  said 
to  have  been  stabilized,  rather  there  was  a  continuous  decline  from 
19.3  cents,  or  parity,  in  October,  1914,  down  to  1 3. 1  cents,  or  67.9 
per  cent  of  parity,  in  March,  19 17. 


3IO        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


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PRINCIPLES    AND   PRACTICE    IN    THE   WORLD    WAR 


3" 


312        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

(b)  From  April,  igij,  to  March,  igig — 

During  this  period  of  about  two  years  the  exchange  rates  oJ 
the  Allied  powers  on  New  York  were  stabilized.  The  method  and 
effects  will  be  discussed  later.  At  present  we  are  primarily  inter- 
ested in  the  quotations.  During  this  period  the  sterling  rates  on 
New  York  remained  practically  stationary  at  $4.76,  or  at  97.9 
per  cent  of  parity.  Franc  rates  in  New  York  rose  upon  the  entry 
of  the  United  States  into  the  war  from  1 7. 1  cents  to  about  1 7.5 
cents,  or  about  90.8  per  cent  of  parity,  which  rate  was  maintained 
through  July,  1918.  From  July,  1918,  through  March,  1919, 
when  the  "peg"  was  released,  francs  ruled  at  18.3  cents,  or  at 
about  95.0  per  cent  or  parity.  French  exchange  was  stabilized  by 
means  of  United  States  government  advances  as  well  as  by  loans 
by  Great  Britain.  The  lira  rates  v/ere  stabilized  least  successfully. 
From  about  13.1  cents,  or  about  67.9  per  cent  of  paritj',  the  lira 
rose  slightly  upon  the  entry  of  the  United  States  into  the  war,  but 
declined  down  to  11. i  cents,  or  57.8  per  cent  of  paritv  in  May, 
1 918,  Avhen  as  the  result  of  aid  by  the  United  States  Treasury 
they  were  stabilized  at  15.7  cents,  or  81.4  per  cent  of  parity.  This 
rate  was  maintained  from  August,  1918,  through  March,  1919. 

(c)  After  March,  IQIQ — 

In  March,  1919,  the  Allied  exchanges  were  "unpegged"  on  the 
New  York  market  and  dropped  precipitately  thereafter.  Of  the 
three  Allied  exchanges,  sterling  dropped  least  and  lire  declined 
most,  with  francs  following  closely.  Before  the  "peg"  was  released 
sterling  was  quoted  at  about  $4.76.  Month  by  month  the  rates 
fell  and  in  December,  191 9,  the  high  rate  for  sight  drafts  during 
the  month  was  $3.98.  During  the  early  part  of  1920  there  was  a 
slight  recovery  followed  by  a  subsequent  relapse,  and  a  further  de- 
cline. Toward  the  end  of  the  year  the  rates  were  maintained 
around  $3.50.  The  high  and  low  demand  quotations  for  1920 
were  $4.06  and  $3.19  as  compared  with  $4.76  and  $3.66  for  the 
3ear  1919.^^ 

The  Paris  rates  declined  to  a  far  greater  extent.  Before  the 
"peg"  was  released  francs  were  quoted  around  18.33  cents  per 
franc.  Thereafter,  the  decline  in  the  rate  was  continuous  prac- 
tically. In  December,  19 19,  the  high  rate  during  the  month  was 
10.08  cents  per  franc.     In   1920  the  decline  continued  through 

"  New  York  Times,  Annalist,  January  3,  1921. 


PRINCIPLES    AND   PRACTICE    IN   THE    WORLD   WAR 


313 


April,  during  which  month  the  high  rate  was  6.93  cents.  There 
was  a  recovery  during  May  and  June  and  a  subsequent  decline. 
In  October  the  high  rate  for  the  month  was  6.75  cents  and  the 
end  of  the  year  was  characterized  by  further  declines.  The  high 
and  low  rate  for  francs  in  1920  was  9.28  cents  and  5.70  cents,  as 
compared  with  18.35  cents  and  8.50  cents  for  the  year  1 919. 


IMoNTHLY  High  Demand  Rates  in  New  York  of  Cureency  of 
Allied  Powers  in  the  World  War  ^* 

Based  on  gold  parity  as  100 


Parities 


1914 

June 

July 

August ... 
September 
October.  . 
November 
December . 

1915 
January. . . 
February. . 
March .  .  . . 

April 

May 

June 

July 

August . . . . 
September. 
October .  . . 
November. 
December. 

1916 
January. . . 
February. . 
March .  .  . . 

April 

May 

June 

July 

August. . . . 
September. 
October. .  . 
November. 
December . 

1917 
January. . . 
February. . 
March .  . . . 

April 

May 

June 

July 

August  . . . 


London. 
$4. 8665 


Percent 
100.50 

114.25 
104 . 03 
102.33 
100. 87 
100.53 


Paris, 
P  19-3 


Percent 
100.62 
112.64 
101.61 
102. 59 
102.59 
101.71 
loi .40 


74  100.26 
65  100.00 
9S.50 
97-46 
97.46 
95-34 
93-63 
91.76 
89.90 
89.90 
89.92 
89.17 


88.86 
88.50 
88.19 
87-36 
87-56 
87.82 
87.72 
87.98 
88.76 
88.76 
88.70 
88.81 


88. 65 
88. 70 
91-24 
90.78 
90.52 
90. di 
89.90 


Milan, 
f  19-3 


Percent 
100.36 
105-75 
105-75 
98.70 
100.21 
97-41 
99-07 


97.31 
95.96 
91.71 

89.79 
90.05 
87.72 
85-49 
83-16 
83-83 
83-32 
80.57 
79-53 


79.12 
77-46 
79-69 
82.12 
83.58 
81-61 
81.24 
80.  i5 
So. 62 
80.16 
77-93 
77.82 


75.23 
73.16 
67.93 
75.18 
73-99 
73.63 
72.18 
71.61 


Parities 


London,    Paris, 
$4.8665    619.3 


1917  Percent 

September 97.72 

October 97-67 

November 97  ■  65 

December 97 .  66 


1918 
January. . . 
February. . 
March .... 

April 

May 

June 

July 

August. . . . 
September. 
October . . . 
November . 
December . 


1919 
January. . . 
February. . 
March .... 

April 

May 

June 

July 

August. . .  . 
September. 
October .  . . 
November. 
December . 

1920 
January. . . 
Februa.-y. . 
March .... 

April 

May 

June 

July 

August. . .  . 
September . 
October . . . 


97.68 
97.68 
97.68 
97.71 
97.71 
97.71 
97.68 
97.98 
97.71 
97.71 
97.76 
97. 78 


77.83 
70.94 
81.22 
82.5s 
80.45 
81.94 
81.19 
76.18 
73 .  20 
72.07 


Milan, 
P  19-3 


Percent  Percent 
89.79 
90.73      67.10 
90.36      65.23 
90.41      64.87 


90.83 
90.73 
90.52 
90.62 
90.83 
90.67 
90.67 
94.61 
94.72 
94.77 
96.11 
95 -02 


94.97 
94.96 
94.81 
88.11 
85.36 
82.63 
79.77 
70.97 
66.25 
61.83 
58.58 
52.23 


48.08 
38.76 
39  17 
35.91 
41.19 
43.47 
44.25 
39.43 
36.32 
34.97 


62.33 
60.93 
62 .07 
58.96 
57.77 
58.50 
64.66 
81.40 
81.3s 
81.61 
81.61 
81.60 


81 .40 
81.44 
81.44 
73.81 
69.08 
66.00 
65.83 
60.10 
5471 
53.14 
51.50 
41.98 


39.12 
32.12 
29.74 
25.44 
31.30 
32.18 
31.87 
27.41 
24.30 
21.66 


"Federal  Reserve  Bulletin,  September,  1918,  pp.  837,  ct  seq.;  January, 
1920,  pp.  49-50;  November,  1920,  pp.  1159-60. 


314        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Lire,  which  were  stabilized  at  about  15.72  cents  before  the 
"peg"  was  released,  declined  continuously  to  8.10  cents,  the  high 
rate  during  the  month  of  December,  191 9.  During  1920  the  fall 
continued  almost  without  interruption  and  in  December,  1920,  the 
rate  fluctuated  around  3.40  cents.  The  high  and  low  quotations  for 
1920  were  7.57  cents  and  3.34  cents  as  compared  with  15.72  cents 
and  7.35  cents  for  1919. 

Toward  the  end  of  1 920  British  exchange  was  at  about  72 
per  cent  of  parity,  French  exchange  at  about  30  per  cent,  and 
Italian  exchange  at  about  17  per  cent  of  parity,  in  New  York. 


ii.  New  York  Rates  on  Neutral  Powers 

(a)   From  August,  IQ14  to  April,  IQ17 — 

Dutch  guilders  and  Swiss  francs  rose  in  the  New  York  market 
shortly  after  the  outbreak  of  the  war,  probably  because  of  the 
sharp  decline  in  American  exports  to  Europe  and  as  a  result  of  the 
increase  of  exports  of  Holland  and  Switzerland  to  the  warring 
countries.  Most  of  the  neutral  exchanges  declined  during  191 5 
as  a  result  of  the  enormous  increase  of  exports  from  the  United 
States.  Guilders  and  Swedish  kroner  rose  in  the  New  York 
market,  possibly  owing  to  the  liquidation  of  securities  on  German 
account.  Spanish  pesetas,  Swiss  francs,  and  Argentine  pesos  were 
at  a  discount  through  191 5  and  in  the  early  part  of  191 6.  How- 
ever, as  the  efforts  to  "peg"  sterling  in  the  New  York  market 
increased  all  the  currencies  of  neutral  Europe  tended  to  rise  in 
New  York.  Before  the  United  States  entered  the  war  the  pre- 
miums on  the  neutral  currencies  had  been  considerable.  Dutch 
'guilders  had  risen  to  a  premium  of  14  per  cent,  Swedish  kroner 
to  16  per  cent,  Swiss  francs  to  5  per  cent,  Spanish  pesetas  to  10 
per  cent  and  Argentine  pesos  to  5  per  cent.  In  spite  of  the  large 
excess  of  exports  of  the  United  States  the  neutral  currencies  were 
at  a  premium  in  New  York  because  of  the  large  loans  by  American 
investors  to  the  Allied  powers.  At  the  time  it  is  contracted  a 
loan,  like  imports,  tends  to  depress  exchange  rates.  Therefore,  our 
loans  tended  to  neutralize  the  effect  of  our  large  excess  of  exports 
in  creating  favorable  exchange  rates  on  the  dollar. 

The  table  for  the  Allied  currencies  from  1914  through  1020 
is  given  herewith : 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  315 

(b)  From  April,  1917  to  March,  igig — 

During  this  period  the  neutral  exchanges  without  exception 
were  at  a  premium  which  reached  levels  that  broke  all  records 
since  the  Civil  War.  The  highest  premium  attained  by  Dutch 
guilders  was  31  per  cent,  by  Swedish  kroner  70  per  cent,  by  Swiss 
francs  35  per  cent,  by  Spanish  pesetas  54  per  cent  and  by  Argentine 
pesos  8  per  cent.  The  details  of  these  fluctuations  and  the  reasons 
therefor  will  be  discussed  more  fully  later. 

(c)  After  March,  igig'^^ — 

After  March,  1919,  when  the  "peg"  on  the  Allied  exchanges 
was  released  in  the  New  York  market,  the  free  play  of  economic 
forces  again  took  effect.  In  view  of  the  large  excess  of  exports  of 
the  United  States  dollar  exchange  rose  on  all  markets  and  con- 
versely all  currencies  declined  on  the  New  York  market  with  a 
few  exceptions,  notably  Argentina  and  Chile,  in  the  trade  with 
v/hlch  countries  the  United  States  had  temporarily  an  excess  of 
imports.  The  premium  of  9  per  cent  on  Spanish  pesetas  in  Febru- 
ary and  March,  1919,  declined  and  by  September  was  wnped  out: 
During  1920  Spanish  exchange  declined  continuously  and  by  the 
end  of  1920  was  quoted  at  about  12.90  cents,  at  a  discount  of 
about  33  per  cent.  The  high  and  low  demand  rates  for  19 19 
were  20.90  cents  and  18.70  cents  and  for  1920  about  19.30  cents 
and  11.75  cents. 

Swiss  francs  were  at  a  premium  of  about  7  per  cent  during 
March,  191 9.  The  rate  declined  subsequently  and  went  to  a  dis- 
count of  about  8  per  cent  in  August,  19 19.  At  the  end  of  Decem- 
ber, 1920,  the  Swiss  franc  was  at  a  discount  of  about  22  per  cent, 
declining  fairly  continuously  throughout  the  year.  The  high  and 
low  rates  for  demand  exchange  for  the  year  1920  were  18.37  cents 
and  15.05  cents,  as  compared  with  20.62  cents  and  17.42  cents 
for  the  year  1919. 

Swedish  kroner  were  at  a  premium  of  about  5  per  cent  during 
February  and  March,  1919,  but  after  the  "peg"  was  released  the 
rate  dropped  fairly  continuously  to  about  83  per  cent  of  parity. 
During  1920  the  rate  declined  to  about  71.5  per  cent  of  parity  in 
February,  rose  intermittenly  during  the  next  five  months  and  from 

"  The  percentages  of  parity  are  taken  from  Federal  Reserve  Bulletin, 
November,  1920,  and  the  Nevir  York  Times  high  and  low  quotations  are 
used. 


3i6 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


03e 

AON 
IX) 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR 


317 


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a, 

3l8        INTERNATIONAL   FINANCE    AND    ITS    REORGANIZATION 

August  to  the  end  of  the  year  declined  fairly  continuously  to  a 
low  level  of  71.5  per  cent  of  parity  in  December.     The  high  and 

Monthly  High  Demand  Rates  in  New  Yosx  of  Currencies  of  Countsies 

Neutral  in  the  World  War  ^^ 

Based  on  gold  parity  as  100 


Amster- 

Stock- 

Zurich, 

Madrid, 

Buenos 

Amster- 

Stock- 

Zurich,'Madrid, 

Buenos 

Mos., 

dam, 

holm, 

Aires, 

Mos., 

dam, 

holm, 

1 

Aires, 

Panty 

40.2 

26.8 

19-3 

19.3 

96.48 

Panty 

40.2 

26.8 

19-3 

19-3 

96.48 

cents 

cents 

cents 

cents 

cents 

cents 

cents 

cents 

cents 

cents 

1914 

1917 

June 

100.27 

100.62 

Aug. 

105.42 

12-5.31 

116.29 

118.39 

101.88 

July 

102.61 

III. 45 

Sept. 

104.80 

128.36 

IIS. 13 

124.87 

101.84 

Aug. 

104.48 

Oct. 

113.80 

156.72117.77 

122.54 

104. IS 

Sept. 

10.3. 85 

103.63 

Nov. 

112.56 

i69.78'ii9.38 

122.80 

110.75 

Oct. 

105.72 

103.01 

Dec. 

110.70 

138.99 

121.35 

126.42 

112.34 

Nov. 

lOI .67 

100.62 

Dec. 

101.04 

99-95 

lOiS 

i     , 

Jin. 

110.07 

127.80 

119. 12.126.42 

108.32 

Feb. 

113.43 

125.00 

116.17 

130.83 

103.75 

191S 

Mar. 

116.29 

126. 87 

120.03 

132.80 

104.59 

Jan. 

100.75 

93-84 

99-17 

99.69 

Aoril 

120.02 

128.73 

121.92 

154.15 

103.30 

Feb. 

100.27 

93.10 

97.88 

100.98 

May 

125.62 

129.66 

135.28 

147. IS 

103.44 

Mar. 

99-50 

95.71 

96.84 

102.49 

June 

126.87 

132.84 

131-50 

147.93 

102.19 

Aoril 

QS.26 

96.27 

97.36 

103.89 

July 

129.35 

133-58 

131.50 

142.75 

105.61 

May 

98.41 

97.01 

97-88 

102.59 

Aug. 

131.22 

135-26 

132.3? 

137.31 

104.97 

Ju-.e 

99-35 

98.77 

98.';o 

98. 86 

Sept. 

123.13 

125-93 

119-38 

121.09 

106. CI 

July 

99.65 

98.51 

95. 84 

99.64 

Oct. 

116.29 

118.66 

112.13 

117.36 

106.83 

Aug. 

100.27 

93.63 

97.56 

100.31 

Nov. 

105.10 

108.21 

105.28 

i-'7.25 

107. iS 

Sept. 

100.42 

97.01 

98.70 

98.45 

97;8S 

Dec. 

106.34 

109.88 

108.39 

104.66 

106.83 

Oct. 

103.23 

97-95 

98.50 

98.70 

98.94 

Nov. 

104.48 

104.85 

97 .  s6 

98.60 

98.35 

1919 

Dec. 

108.21 

104.66 

98. 86 

97.93 

98.94 

Jan. 

106.34    108.58 

107.49 

104.3s 

106.36 

Feb. 

102. 5i 

105.04 

106 . 72 

109.33 

105.89 

1916 

Mar. 

102 . 30 

103.04 

107.25 

109.33 

106.01 

Jan. 

114.10 

104.96 

100.98 

99.07 

99.22 

April 

102.61 

101.21 

105-31 

105.57 

104.53 

Feb. 

106.02 

107. 2S 

100.05 

99.74 

104.71 

May 

100.12 

99.63 

103.21 

104.92 

105.71 

Mar. 

106.34 

10S.21 

39-43 

100.36 

100.40 

June 

97.64 

97.9s 

100.03 

103.94 

103.82 

April 

107 . 59 

113-81 

100.21 

lOI .81 

100.40 

July 

96.39 

95-15 

98.86 

102.18 

IOI.S3 

May 

104.15 

116.60 

100.03 

103.36 

99.69 

-A.ug. 

93-44 

92.91 

92.85 

102.33 

99-82 

June 

103.86 

113.43 

99  07 

107.25 

99.53 

Sept 

94-84 

91.79 

94-72 

99.74 

101.88 

July 

103.08 

10S.77 

93.13 

103.18 

99-53 

Oct 

94-68 

91.79 

93-19 

99.90 

99-76 

Aug. 

103 . o3 

107.46 

97.88 

104.66 

98.21 

Nov. 

94-53 

88.9c* 

94.20 

104.14 

102. i3 

Sept. 

102. 29 

107.09 

97.88 

104.46 

99.86 

Dec. 

95-15 

83.21 

104.04 

103. II 

101.88 

Oct. 

102.46 

106.34 

98.6s 

103.18 

101.65 

Nov. 

101.99 

106.16 

100.21 

106.48 

102.24 

1920 

Dec. 

101.57 

109.89 

105.08 

no.  10 

105.75 

Jan. 

97-33 

80.41 

94.72 

99.48 

101. 83 

Feb. 

94.22 

71-46 

89.79 

93.26 

102.77 

1917 

Mar. 

92.35 

80.97 

89.02 

92.73 

102.33 

Jan. 

101.52 

110.63 

103.63 

110.10 

104.45 

April 

93. 28 

82.84 

93.89 

92.7s 

101 . 89 

Feb. 

101.37 

110.45 

103.63 

110.62 

104-73 

May 

91.29 

80.78 

92-75 

''7.93 

100.70 

Mar. 

100.75 

III. 94 

103.32 

112. 6g 

103.72 

June 

91.23 

82.09 

94.56 

86,53 

103.77 

April 

103. 86 

113  06 

102.80 

1I3..17 

101.04 

July 

90.30 

82.46 

93.99 

85.60 

98-35 

May 

102.61 

TII.94 

102.63 

117.88 

104.26 

Aug. 

84.  27 

78.36 

87.82 

79.12 

92.51 

June 

102 . 46 

113.06 

107.25 

122.34 

104.26  1 

Sept. 

79-35 

76.12 

85.23 

77.46 

89.81 

July 

103.16 

3 

SI 

114. 61 

120.73 

103 . 58 

Oct 

77.26 

74.25 

83  26 

75.95 

85.77 

"Source:  Federal  Reserve  Bulletin,  September,  1918,  January,  1920, 
and  November,  1920. 

For  course  of  several  currencies  on  the  markets  of  European  neutrals 
see  the  Bulletin  for  September,  1917,  May,  1918,  June,  1919  and  November, 
1919. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  319 

low  rates  for  Swedish  kroner  in  1920  were  22.15  cents  and  17.76 
cents  as  compared  with  29.12  cents  and  20.50  cents  for  the  j'ear 
1919. 

Danish  exchange  was  about  par  in  January,  1919,  and  declined 
almost  without  interruption  throughout  the  year.  In  December, 
1919,  the  rate  was  about  74.2  per  cent  of  parity.  In  1920  there 
was  a  sharp  break  in  February  to  about  58  per  cent  of  parity,  the 
rate  rose  slightly  during  the  next  five  months  and  declined  con- 
tinuously thereafter  to  the  end  of  the  year,  when  demand  rates 
were  at  about  56  per  cent  of  parity.  The  high  and  low  demand 
quotations  for  the  year  1920  were  19.05  cents  and  13.00  cents 
as  compared  with  26.88  cents  and  17.20  cents  for  the  year  1919. 

Dutch  guilders  were  at  a  premium  of  about  2  per  cent  a 
parity,  which  is  40.2  cents  per  guilder,  during  February  and  March, 
1 91 9.  The  decline  was  less  than  that  of  the  Scandinavian  cur- 
rencies. At  the  end  of  the  year  guilders  were  quoted  about  95 
per  cent  of  parity.  The  decline  during  1920  was  continuous  and 
at  the  end  of  the  year  they  were  quoted  at  about  75  per  cent  of 
parity.  The  high  and  low  quotations  for  1920  were  39.06  cents 
and  29.25  cents  as  compared  with  42.57  cents  and  36.88  cents 
for  1919. 


iii.  Currency  of  the  Central  Poivers 

(a)  From  August,  igi4  to  April,  igjy — 

Marks  were  at  a  slight  premium  in  the  early  part  of  the  war 
but  declined  below  par  before  the  end  of  1914.  During  191 5,  the 
decline  was  practically  continuous  from  a  high  rate  of  92.8  per 
cent  of  parity  in  January  to  83.8  per  cent  in  December.  During 
1916  the  rate  fluctuated  with  the  military  fortunes  of  Germany. 
In  May  the  high  rate  was  82.  i  per  cent  of  parity  and  in  November 
the  high  rate  was  73.7  per  cent.  At  the  entry  of  the  United  States 
into  the  war  the  mark  was  at  about  75.1  per  cent  of  parity  Vvhich 
was  relatively  lower  than  francs,  though  not  quite  so  low  as 
lire  or  rubles. 

The  course  of  Austrian  kronen  is  similarly  a  record  of  a  prac- 
tically continuous  decline  from  parity  at  the  outbreak  of  the  war 
to  about  54  per  cent  of  parity  before  April,  191 7,  relatively  the 
lowest  of  all  the  belligerent  exchanges. 


320        INTERNATIONAL   FINANCE    AND    ITS    REORGANIZATION 

(b)   During  the  Belligerency  of  the  United  States — 

During  the  belligerency  of  the  United  States  trading  in  German 
marks  and  Austrian  kronen  was  suspended  in  New  York.  The 
course  of  these  exchanges  must  therefore  be  followed  on  a  neutral 
market.  The  reader  can  construct  the  hypothetical  rates  of 
German  marks  and  Austrian  kronen  in  New  York  by  multiplying 
the  percentage  of  parity  of  marks  in  Switzerland  by  the  percentage 
of  parity  of  Swiss  francs  in  New  York.  During  January,  Febru- 
ary, and  March,  of  191 7  the  high  demand  rates  for  Swiss  francs  in 
New  York  was  about  103  per  cent  of  parity.  The  average  of 
demand  rates  for  German  marks  in  Basle  was  68.5,  66.6  and  64.2 
per  cent  of  parity  during  the  first  three  months  of  the  year.  The 
rates  of  German  marks  in  New  York  were  75.0,  74.4  and  75.1 
per  cent. 

Upon  the  entry  of  the  United  States  into  the  war  the  monthly 
average  demand  rates  for  marks  in  Switzerland  declined  month 
by  month  from.  64.2  per  cent  in  April,  1917,  down  to  51.O  per  cent 
in  October,    191 7.     The  armistice  with  Russia,  the  Treaty  of 


Movement  of  Demand  Exchange  Rates  of  Marks  and  Kronen  in 
s\\7tzerland  during  the  period  of  the  belligerency  of  the 
United  States  ^' 

Based  on  gold  paritj'  as  100 


Month 


1917 
January. . . . 
February. . . 

March 

April 

May 

June 

July 

August 

September . . 
October . . . . 
November. . 
December.  . 


Berlin 

Vienna 

68.53 

51.80 

66 

62 

48 

80 

64 

19 

47 

71 

64 

19 

47 

22, 

60 

«3 

46 

09 

.S.S 

48 

41 

42 

.SI 

4.S 

38 

81 

51 

64 

38 

85 

52 

49 

39 

52 

."51 

0.3 

37 

85 

.■52 

6,5 

38 

2,?, 

6q 

46 

5° 

00 

Month 

1918 
January. . 
February. 
March .  . . 

April 

May 

June 

July 

August. . . 
September 
October . . . 
November 
December . 


Berlin 


67.03 

70.27 

68.93 
66.50 
64.07 
55-89 
53-27 
55-40 
54-65 
58.29 
50.81 
48.58 


Vienna 


.00 
76 
.61 
.09 
.42 
.09 
.62 
.16 

-94 
.00 
.16 

.01 


"  Compiled  by  Federal  Reserve  Board  from  Revue  Commerciale  et 
Industrielle  Suisse,  1914-1918.  Federal  Reserve  Bulletin,  Septennber,  1918, 
and  June,  1919. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR 


321 


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322        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Brest-Litovsk,  and  the  successful  German  offensive  in  the  spring 
of  191 8  all  tended  to  raise  the  value  of  the  mark.  It  reached  a 
high  level  in  February,  19 18,  when  the  rate  was  70.3  per  cent. 
Thereafter  the  monthly  averages  declined  with  slight  interruptions 
to  54.6  per  cent  of  parity  in  September,  50.8  per  cent  of  parity  in 
November,  48.6  per  cent  of  parity  in  December,  1918,  and  so 
on  down. 

(c)   After  July,  IQ19 — 

When  trading  in  enemy  exchange  was  resumed  in  New  York 
in  July,    19 19,  the  high  rate  for  marks   during  the  month  was 

8.00  cents  or  about  33.6  per  cent  of  parit)^  The  decline  through 
the  rest  of  the  year  was  continuous  and  pronounced,  and  in  Decem- 
ber, 1919,  the  high  rate  was  about  ii  per  cent  of  parity.  During 
1920  the  rate  continued  to  decline  in  the  early  part  of  the  5'ear, 
rose  sharply  in  May  to  about  12.3  per  cent  of  parity,  maintained 
that  level  for  the  next  three  months,  and  declined  thereafter  to 
the  end  of  the  year.  The  boom  in  marks  was  due  to  heavy 
purchases  of  German  securities  by  speculators.  The  last  five 
months  of  the  year  were  characterized  by  a  decline  almost  to  the 
low  level  of  the  year.  In  December  marks  were  quoted  at  around 
1.30  cents.    The  high  and  low  demand  rates  for  the  year  1920  were 

3.01  cents  and  1. 01  cents  as  compared  with  about  7.00  cents  and 
2.00  cents  for  the  year  1919.^^* 

In  July,  191 9,  Austrian  kronen  were  quoted  at  a  high  rate  of 
3.50  cents  or  1 7.3  per  cent  of  parity.  There  was  a  terrific  decline 
during  the  rest  of  1 9 19,  the  high  demand  rate  in  December  being 
only  3.6  per  cent  of  parity.  This  decline  was  continued  and  in 
February  of  1920  the  rate  was  about  2.0  per  cent.  There  Avas  a 
subsequent  recovery,  owing  to  speculative  purchases  by  foreigners 
of  Austrian  securities  as  well  as  to  the  tendency  toward  ameliora- 
tion of  the  terms  of  the  Treaty  of  Peace.  The  high  record  was 
reached  in  June,  and  there  was  a  subsequent  decline.  Toward  the 
end  of  the  3'ear  Austrian  kronen  were  quoted  at  about  0.22  cent 
or  about  i.i  per  cent  of  parity.  The  course  of  the  rates  in  New 
York,  Stockholm  and  Basle  is  shown  herewith. 

11*  New  York  Times  Annalist,  Jan.  5,  1920,  and  Jan.  3,  1921. 


PRINCIPLES    AND   PRACTICE    IN   THE   WORLD   WAR 


323 


Movement  of  Monthly  High  Demand  Rates  of  Marks  and  Kronen  in 
New  York  Before  and  After  the  Period  of  the  Belligerency 
OF  the  United  States  '^ 

Based  on  gold  parity  as  100 


Before 


1914 
June 

July 

August. . . 
September 
October. . 
November 
December 


1915 
January. .  . 
February. . 
March .  . . . 

April 

May 

June 

July 

August . . . . 
September 
October  .  . 
November . 
December . 

1916 
January.  .  . 
February. . 
March .  . .  . 

April 

May 

June 

July 

August. .  .  . 
September. 
October .  .  . 
November. 
December . 

1917 

January. . . 
February . . 
March .  . . . 


Berlin        Vienna 


100. 25 
loi. 10 
loi.Sg 


99.00 

93  09 
97.16 


80.62 
81.41 
77.07 
80.36 
82.06 
81.01 
78.26 
76.02 
74-52 
74.12 

73-73 
79.04 


75-04 
74-44 
75-11 


00 

10 

00 

34 

00 

34 

97 

88 

88 

o.S 

88 

67 

63-65 
73-89 

64.04 
67.09 

66.50 
65-27 
63-05 
61.58 

59-85 

59-11 
58.52 
66.01 


58.08 
54-68 
56.65 


After 


1919 

July 

Augiist . . . 
September 
October. . 
November 
December 


1920 
January. . , 
Februaiy. . 
March ... 

April 

May 

June 

July 

August . . . , 
September 
October .  . , 


Berlin        Vierma 


33-59 
30.44 
19-31 
18.37 
13.64 
10.92 


8.61 
4-79 
6-59 
8.19 

12.34 

11-54 

II. 13 

9.61 

8.52 

6-93 


17.27 
14.80 

12.95 
8.14 

4-93 
3.60 


^Source:   Federal    Reserve   Bulletin,   September,    1918,   January,    1920, 
and  November,  1920. 


324        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


High  Monthly  Rate  of  Marks  in  Stockholm  " 
Based  on  gold  parity  as  loo 


Ixlonth 


1914 

July 

August .... 
September. 
October .  . . 
November. 
December . 


1915 
Januar>'. .  . 
February. . 
March .... 

April 

May 

June 

July 

August. . .  . 
September. 
October .  .  . 
November. 
December. 


1916 

January . .  . 
February . . 
March .  .  . . 

April 

May 

June 

July 

August .... 
September. 
October . . . 
November. 
December. 


1917 
January. . 
February. 


Rate 


100.24 
100.41 
100.46 
100. 12 
95.62 
99-56 


98.72 
98.32 

95-34 
92.25 
90.00 
88.42 
90.56 
88.54 
.89.72 
88.99 
86.91 
81.00 


77.96 
74.98 

72.39 
70.87 
70.31 
71. 16 
72.  II 
70.99 

70.59 
69.86 
69.30 
66.09 


64.68 
64.40 


ISIonth 


1917 
March .  .  . . 

April 

May 

June 

July 

August . . . . 
September 
October . . . 
November, 
December . 

1918 
January. . 
February. , 
March ... 

April 

May 

June 

July 

August. . . 
September 
October . . 
November 
December. 

1919 
January. . 
February . . 
March.  .  .  , 

April 

May 

June 

July 

August . . . . 
September 
October . . . 
November. 


Rate 


64.96 
59.62 
58.11 
56.81 
52.87 
48.66 
46.86 
44.72 
50.62 
66.94 


69-75 
70.31 
70.87 
67.22 
66.09 
64.97 
57-37 
53-44 
56-25 
66.94 
59.06 
50-34 


49.78 
47-81 
42.47 
38.25 
40.78 
36.00 
29.81 
27.28 
22.50 
19.69 
14.62 


'Federal  Reserve  Bulletin,  January,  1920,  p.  42. 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 


325 


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326        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


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PRINCIPLES   AND   PRACTICE    IN   THE   WORLD   WAR 


327 


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328        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


PRINCIPLES   AND   PRACTICE   IN  THE   WORLD   WAR  329 

C.  The  Causes  of  Exchange  Fluctuations 

Before  the  war  the  limited  exchange  fluctuations  were  due 
primarily  to  commercial  factors,  such  as  changes  in  the  volume  of 
exports  or  imports  of  commodities  or  of  gold,  or  to  the  flow  of 
capital  incident  to  borrowing  or  lending.  But  during  the  war 
embargoes  on  the  shipment  of  goods,  on  the  movement  of  gold,  and 
on  the  buj'ing  and  selling  of  securities  warped  the  exchange  rates. 
In  addition  fiscal  and  political  factors  which  affected  the  likelihood 
of  resumption  of  specie  paj-ment  had  an  important  part  in  dis- 
locating exchange  rates. 

i.   Commercial  Factors 

(a)  Before  "Pegging"  Sterling — 

The  outstanding  commercial  factor  was  the  large  excess  of 
exports  from  the  United  States  which  increased  throughout  the 
war.  In  the  early  part  of  191 5  this  growth  in  exports  was  reflected 
in  the  decline  of  all  the  exchanges  on  the  New  York  market. 

(b)  During  the  "Peg" — 

Sterling  was  "pegged"  in  New  York  through  the  large  borrow- 
ings by  Great  Britain  and  the  resale  of  Am.erican  securities  and 
the  shipment  of  gold.  These  factors  stabilized  the  Allied  exchanges 
at  an  artifically  high  level.  In  the  free  exchange  markets  of  the 
neutral  countries  of  Europe,  the  Allied  currencies  depreciated  to 
their  natural  level,  for  the  large  excess  of  imports  by  the  Allied 
countries  was  not  offset  by  the  exportation  of  gold  and  securities. 
It  then  became  profitable  to  buy  the  Allied  exchanges,  chiefly 
sterling,  at  their  depreciated  values  in  the  neutral  markets  of 
Europe  and  to  sell  them  at  the  higher  prices  prevailing  in  the 
stabilized  market  in  New  York,  Or  neutral  dealers  could  sell 
sterling  in  London  for  dollars  and  sell  the  dollars  in  New  York, 
The  resulting  abundance  of  dollar  exchange  naturally  caused  its 
depreciation.  During  the  entire  period  of  our  belligerency  and 
until  the  "peg"  was  released  neutral  exchanges  were  at  a  premium 
in  New  York,  as  shown  above. 

Erroneous  explanations  were  offered  for  the  appreciation  of 
neutral  exchange  in  New  York.^°     It  was  said  that  "the  dollar 

^Harvard  Review  of  Economic  Statistics  for  July,  1919,  "Balance  of 
Trade  of  the  United  States,"  p.  244,  footnote  i  refers  to  the  "unfavorable 
balance  of  trade  of  the  United  States  in  the  neutral  markets." 


330        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

went  to  a  marked  discount  in  neutral  markets  after  our  entry  into 
the  war  chiefly  because  our  balances  in  these  countries  were  un- 
favorable to  us."  This  explanation  is  obviously  incorrect.  After 
our  entry  into  the  vi^ar  the  United  States  had  an  excess  of  exports 
in  its  trade  with  all  the  neutral  countries  of  Europe  except  Switz- 
erland, as  shown  in  the  table  herewith.  It  is  only  in  our  trade  with 
the  South  American  countries  that  we  had  an  excess  of  imports. 


Foreign  Trade  of  the  United  States  witk  Certain  Foreign  Countries  ^^ 

Excess  of  exports  (+)  or  of  imports  (— ) 

(in  million  dollars) 


Country 

United  Kingdom . 

France 

Italy 

Russia 

Denmark 

Sweden 

Norway 

Netherlands 

Spain 

Switzerland 

Germany 

Austria 

Argentina 

Brazil 

Chile 


I9I3 

1914 

1913 

1916 

1917 

1918 

+311-9 

+304-9 

+888.8 

+1498.2 

+1586.2 

+1834-4 

+  iS-o 

+  65.9 

+422.9 

+ 

751.9 

+  842.2 

+  871.7 

+  23.3 

4-42.7 

-t-2l8.2 

+ 

243.3 

+  382.6 

+  467.8 

+      .36 

+  10. 0 

+123.4 

+ 

305.3 

+  302.9 

+       2.1 

+  16.1 

+  38.1 

+  70.8 

+ 

S3. 3 

+     31.4 

+     10.6 

+     1.7 

+  19.2 

+  73-9 

+ 

29.1 

+       2.4 

+       9.7 

+     0.8 

+     7.7 

+  39-2 

+ 

59.8 

+     56.6 

+     34.1 

+  83.9 

+  63.2 

+114. 5 

+ 

70.1 

+     30.0 

+       2.5 

+     6.4 

+     5.8 

+  27.0 

+ 

31.7 

+     54-7 

+     SO.  7 

—  23. S 

—  20.7 

—  13-9 

— 

8.8 

—       0.4 

+     10.7 

+167.7 

+     8.9 

—  33.2 

— 

3.6 

—       0.2 

—      0.3 

+     3.1 

—     2.9 

—      5-2 

— 

o.b 

—       0.1 

—       0.1 

+  29.4 

—  29.1 

—  41.8 

— 

39-4 

—     71.2 

—  123.3 

—  61.0 

—  71.7 

—  86.1 

— 

84.4 

—     79.1 

—     40.6 

—  12.9 

—  10.6 

—  19.5 

48.7 

—     85.0 

—     99.7 

1919 


+1857. s 
+  769. 5 
+  383-6 
+     27-3 

+  IS7-8 

+  "9-3 

+  127.8 

+  179-6 

+  S3 -3 

+  48. 5 


—  43-3 

—  118.9 

—  29.3 


The  correct  explanation  --  is  that  the  neutral  currencies  appre- 
ciated in  the  New  York  market  because  the  United  States  bought 
more  of  the  neutral  currencies  from  Great  Britain  than  it  sold 
to  Great  Britain,  and  because  the  neutrals  sold  more  sterling  in 
New  York  than  they  bought  there.  In  other  words,  because 
of  the  inter-Allied  financial  unity  the  aggregate  of  Allied  exports 
was  less  than  the  aggregate  of  Allied  imports.  This  will  be  treated 
more  fully  in  the  discussion  of  the  mechanism  of  stabilization  of 
exchange. 

The  appreciation  of  the  Scandinavian  exchanges  in  New  York 
was  due  in  part  to  the  large  credits  due  the  Scandinavian  countries 
on  account  of  shipping.  Norway's  credit  on  this  account  amounted 
to  120  million  kroner  in  1910,  about  220  million  in  1913,  about 
475  million  in  1915,  and  to  1063  million  kroner  in  1916.-^ 

"^Statistical  Abstract,  1919. 

"Report  of  the  Federal  Reserve  Board  for  the  year  1918,  p.  53,  ei  seq, 

•'Stavanger  Aftonblad,  June  14,  1918. 


PRINCIPLES   AND   PRACTICE   IN   THE   "WORLD   WAR  33 1 

Another  factor  in  raising  the  New  York  exchange  rates  of  the 
European  neutrals  was  the  restriction  bj'  neutrals  on  gold  settle- 
ments. For  instance,  although  at  parity  a  dollar  is  equal  to  5.18 
pesetas,  the  Bank  of  Spain  refused  to  accept  American  gold  at 
more  than  5.03  pesetas.  This  discount  on  gold  in  Spain  accounts 
for  part  of  the  premium  on  pesetas  in  New  York.  Again  the 
Scandinavian  countries  at  first  purchased  gold  at  a  discount  of 
about  5  to  6  per  cent  and  subsequently  put  an  embargo  on  gold 
imports.  The  acute  shortage  of  goods  in  the  neutral  countries  of 
Europe  caused  a  rise  in  prices  which  was  aggravated  by  the  increase 
in  the  quantity  of  gold.  The  desire  to  avoid  this  so-called  gold 
inflation  accounts  partly  for  the  appreciation  of  the  neutral 
exchanges.  The  theory  of  the  neutrals  in  both  cases  was  that 
their  credits  ought  to  be  settled  by  imports  of  merchandise. 

(c)   After  the  Release  of  the  "Peg" — 

Upon  the  discontinuance  of  the  stabilization  of  sterling  exchange 
in  the  New  York  market  the  normal  play  of  economic  forces 
again  became  apparent.  The  United  States  had  a  large  excess 
of  exports,  embargoes  on  goods  were  removed,  gold  was  again 
free  to  flow,  and  the  currencies  of  the  European  neutrals  fell  to 
an  ever-increasing  discount.  Only  the  South  American  currencies, 
as  shown  above,  temporarily  maintained  their  premium  in  the  New 
York  market.  The  reason  vras  obvious.  The  United  States  had 
an  excess  of  imports  from  these  countries. 

ii.  Fiscal  Factors 

The  commercial  factor  accounts  for  the  daily  variations  in 
exchange  rates.  A  large  offering  of  bills  m.ay  cause  a  violent 
break  in  the  market.  But  exchange  rates  also  respond,  though 
not  so  sensitively,  to  the  depreciation  of  the  currency.  To  use  an 
analogy,  the  currency  factor  corresponds  to  the  climate,  the  com- 
mercial factor  corresponds  to  the  weather.  Usually  both  tlie  com- 
mercial and  the  currency  factors  produce  the  same  results,  for 
during  a  period  of  borrowing  or  excessive  issue  of  paper  a  country 
usually  has  an  excess  of  imports.  During  and  since  the  war  the 
countries  of  Europe  lacking  raw  materials  have  had  a  large  excess 
of  imports,  and  at  the  same  time  a  depreciating  currency.  If 
these  countries  had  increasing  exports  the  currency  situation  would 


332        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

gradually  improve.  This  condition  obtained  in  the  United  States 
after  the  Civil  War.^*  However,  sometimes  the  two  factors  operate 
in  opposite  directions.  For  instance,  during  the  period  from 
March  to  April,  1920,  German  exchange  was  rising  on  all  the 
markets  of  the  world  in  spite  of  the  fact  that  the  circulation  of 
banknotes  increased  from  48  to  56  billion  marks.  But  this  was 
due  to  a  peculiar  condition. 

The  depreciation  of  exchange  rates,  however,  is  not  an  accurate 
measure  of  the  decline  in  the  ratio  of  gold  to  notes.  Following 
are  the  figures  for  Germany: 


Date 


Ratio  of  gold  to 
total  note  issues 


Rates  of  exchange 
cents  per  mark 


June  30,  1920 

June,  1914 

Ratio  of  post-war  to  pre-war  figure 


1 . 4  per  cent 
59 . 6  per  cent 

2 . 4  per  cent 


2.65 
23.80 

1 1 . 1  per  cent 


A  comparison  for  France  shows  a  similar  result. 


Date 


Ratio  of  gold  to 
total  notes 


Rates  of  exchange 
cents  per  franc 


November  11,  1920. 
June,  1914 


Ratio  of  post-war  to  pre-war  figures .  .  .  . 


8 .  2  per  cent 

59.5  percent 

13 . 6  per  cent 


5. an 
19.30 

30 . 5  per  cent 


The  exchange  rates,  depreciated  as  they  are,  do  not  measure 
the  full  extent  of  note  inflation.  External  depreciation  is  less  than 
Inflation  of  currency.  This  difference  may  be  due  to  the  fact  that 
the  large  volume  of  gold  before  the  war  could  have  been  reduced 
considerably  without  impairing  the  convertibility  of  the  paper 
money.  Theoretically  if  visible  and  invisible  imports  balanced 
exports  exactly  and  if  gold  flowed  freely  the  depreciation  of 
exchange  rates  would  equal  the  premium  on  paper  money.  The 
fiscal  causes  of  exchange  depreciation  are  closely  connected  with 
the  commercial  causes.     Fiscal  factors,  such  as  the  issue  of  notes 


"*  Hepburn,  A.  B.,  History  of  Currency,  1915  ed.,  pp.  226,  227. 
Mitchell,  Wesley  C,  History  of  Greenbacks. 


See  also 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  333 

by  the  state,  and  monetary  factors,  such  as  the  fre^  circulation 
of  gold  coins  regulate  relative  international  price  levels  in  gold. 
Relative  price  levels  determine  the  flow  of  trade.  As  noted  above, 
a  regime  of  inconvertible  paper  usually  follows  a  period  of  heavy 
foreign  borrowing  and  of  inflation  of  the  currency.  Such  was  the 
case  both  in  Argentina  in  the  latter  half  of  the  nineteenth  century 
and  in  the  belligerent  countries  of  Europe  during  the  World  War. 
The  correctives  of  exchange,  discussed  above,  apply  chiefly  when 
depreciation  is  due  to  commercial  factors. 

iii.  Political  and  Other  Factors 

There  are  other  causes  of  exchange  fluctuations.  The  fortunes 
of  war  had  a  decisive  effect.  When  the  United  States  entered  the 
war  in  191 7,  francs  and  lire  rose  on  the  world  markets  but  marks 
and  Austrian  kronen  declined.  In  the  fall  of  19 1 7  the  successful 
Austrian  campaign  against  Italy,  followed  shortly  by  the  complete 
defeat  of  Russia  and  Rumania  by  Germany,  led  to  a  sharp  rise 
in  German  and  Austrian  exchange.  The  signing  of  the  Treaty 
of  Brest-Litovsk  and  the  German  offensive  in  France  in  the  spring 
of  1 91 8  maintained  these  exchanges  at  a  high  level  until  the 
summer.  The  spirited  fighting  of  the  fresh  American  troops,  the 
turning  of  the  tide  at  Chateau-Thierry,  and  the  successful  counter- 
offensive  by  Foch  marked  the  beginning  of  a  rapid  and  continuous 
decline  of  these  exchanges.  From  a  quotation  of  about  70  per 
cent  of  parity  in  the  spring  of  1918,  marks  fell  to  about  50  per 
cent  at  the  signing  of  the  armistice.  Austrian  kronen  fell  from  a 
quotation  of  about  55  per  cent  of  parity  to  about  31  per  cent  in  the 
same  period. 

Similarly  the  neutral  exchanges  declined  in  New  York  upon 
the  entry  of  the  United  States  into  the  war  and  likewise  declined 
very  rapidly  from  their  high  levels  in  the  summer  of  191 8,  follow- 
ing the  successful  offensive  against  the  Germans.  In  this  period 
the  premium  on  Swedish  kroner  declined  from  about  37  per  cent 
to  about  7  per  cent,  Dutch  guilders  from  a  premium  of  about  28 
per  cent  to  3  per  cent,  and  on  Swiss  francs  from  about  3 1  per  cent 
to  3  per  cent. 

Other  factors  influencing  exchange  rates  were  tfce  adoption  of 
measures  to  increase  taxes  and  other  revenue,  the  flotation  of 
war  loans,  the  increase  of  note  issues,  the  gain  or  loss  in  gold, 


334        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

in  short  all  events  of  political  or  social  importance,  including 
rumors  and  psychological  factors  which  affect  the  future  balance 
of  trade,  and  the  convertibility  of  the  depreciated  paper. 

D.  The  Effects  of  Depreciation  of  the  Foreign  Exchanges 

The  depreciation  of  the  foreign  exchanges  causes  instability  of 
trade.  Some  economists  have  held  that  both  commercially  and 
financially  a  falling  exchange  tends  to  correct  itself.  Others  have 
held  the  opposite  view.  The  difference  of  opinion,  however,  is 
reconcilable  because  the  two  opposite  effects  observed  are  due  to 
two  separate  sets  of  causes. 

i.  The  Self-Corrective  Effect  of  Depreciation 

(a)    Commercial  Self-Correctives — 

I.  Exports  are  fostered — A  depreciated  exchange  tends  to 
foster  a  country's  exports  and  to  check  its  imports.  For  instance, 
the  decline  of  Danish  exchange  in  New  York  after  the  release 
of  the  "peg"  caused  a  heavy  shipment  of  butter,  eggs  and  potatoes 
from  Denmark  to  the  United  States  in  spite  of  the  fact  that  all 
of  these  foods  were  in  great  demand  in  Central  Europe.  Danish 
exchange  stiffened  as  the  result  of  the  demand  to  pay  for  the 
Imports.-^  Similarly  Spanish  onions,  Asiatic  peanuts,  Irish  potatoes 
and  cabbage  from  the  neutral  countries  of  Europe  began  to  com- 
pete with  the  American  products  owing  to  the  decline  in  exchange 
in  the  early  part  of  1920.  Again,  in  competition  with  both  Bel- 
gium and  Great  Britain,  Germany  was  a  successful  bidder  on  a 
large  French  order  for  locomotives,  in  spite  of  the  fact  that  the 
French  would  have  preferred  to  trade  v/ith  their  former  Allies.^® 
The  decline  in  German  exchange  on  the  French  market  gave  the 
German  exporter  a  temporary  bounty  which  stimulated  exports 
and  thus  tended  to  correct  the  falling  mark.  The  fall  of  the 
mark  in  the  autumn  of  19 19  and  in  the  early  part  of  1920  brought 
a  host  of  foreign  buyers  into  Germany  to  take  advantage  of  the 
so-called  "clearance  sale."  The  heavy  exports  tended  to  check 
the  fall  and  in  the  spring  of  1920  the  mark  rose,  owing  in  part 
probably  to  the  increase  of  exports  (and  in  part  to  the  speculative 
purchases  of  German  securities  by  foreigners). 

^Ne^Y  York  Times,  January  3,  1920,  and  December  9,  1920. 
^Journal  of  Commerce,  December  i,  1920. 


PRINCIPLES   AND   PRACTICE    IN   THE   WORLD   WAR  335 

The  self-corrective  effect  of  the  declining  exchanges  of  Europe 
led  to  legislative  proposals.  For  instance,  the  woolen  manufac- 
turers, testifying  before  the  Ways  and  Means  Committee  of  the 
House,  ^^  proposed  measures  to  prevent  the  falling  exchanges  from 
correcting  themselves.  A  law  was  recommended  to  "normalize 
exchange  by  levying  a  tax  of  the  difference  in  cost  between  goods 
imported  under  thejcurrent  and  under  the  normal  rate  of  exchange." 
The  law  contemplated  assessments  not  at  the  depreciated  rate  but 
at  the  normal  rate  of  exchange.  Furthermore,  to  prevent  dump- 
ing of  foreign  goods,  whether  dutiable  or  not,  the  federal  govern- 
ment was  urged  to  collect  an  "equalizing  charge"  or  the  difference 
between  the  amount  payable  at  the  current  rate  of  exchange  and 
at  the  normal  rate.  This  petition  is  similar  to  that  of  the  associa- 
tions of  Swedish  and  of  Swiss  industries  to  the  respective  Ministers 
of  Finance  for  protection  against  the  competition  of  German 
manufacturers  who  were  favored  by  the  depreciation  of  the  mark. 

2.  Imports  are  checked — The  decline  of  the  exchanges  on 
the  New  York  market  led  to  a  restriction  of  imports  into  the 
several  countries  from  the  United  States.  The  Association  of 
Boot  and  Shoe  Manufacturers  of  Brazil  passed  a  resolution  to 
discontinue  imports  of  leather  from  the  United  States  until  the 
American  dollar  declined  to  parity,  or  the  Brazilian  milreis  rose 
to  parity.^^  Again,  the  depreciation  of  the  Canadian  dollar  in 
the  United  States  induced  curtailment  of  Canadian  purchases  in 
the  United  States.  The  Canadian  Wholesale  Grocers'  Associa- 
tion favored  the  discontinuance  of  purchases  in  the  United  States, 
and  the  Board  of  Trade,  the  bankers',  wholesalers'  and  consumers' 
organizations  of  Winnipeg  urged  discrimination  against  American 
products  to  reduce  Canadian  imports  in  order  to  raise  the  level 
of  the  Canadian  dollar  in  the  New  York  market.  At  the  same 
time  they  advised  a  preferential  for  British  goods  because  of  the 
depreciation  of  sterling.-^  The  depreciation  of  Belgian  exchange 
checked  imports  from  the  United  States  and  to  a  less  extent  from 
Great  Britain,  and  stimulated  imports  from  Germany.^" 

"  December  8,  1920. 

"'  Journal  of  Commerce,  December  2,  1920. 

'^Associated  Press  despatch,  Toronto,  February  7,  1920,  and  Winnipeg, 
February  6,  1920. 

^  Report  of  Trade  Commissioner  C.  E.  Herring,  Commerce  Reports, 
October  29,  1919. 


336        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

3.  Explanation^! — ^What  is  the  explanation  of  this  phe- 
nomenon ?  Is  it  that  the  depreciation  of  the  exchange  of  a  country 
acts  as  a  bounty  to  its  exporters  and  a  burden  to  its  importers? 
This  would  be  true  if  the  price  level  within  the  country  were  no 
higher  than  when  exchange  was  at  parity.  A  truer  explanation 
is  that  the  depreciation  of  exchange  rates  keeps  pace  with  the  rise 
In  the  price  of  gold  but  that  the  general  price  level  lags  behind. 
As  a  result  the  exporter  from  a  country  with  depreciated  exchange 
buys  at  the  general  price  level,  and  sells  to  the  foreigner  at  the 
equivalent  of  a  higher  price  level.  The  profit  to  the  exporter 
arises  from  the  re-conversion  of  the  foreign  stable  currency  into 
his  own  depreciating  currency.  Naturally  the  demand  for  goods 
for  export  tends  to  make  prices  rise  and  until  the  general  price 
level  reaches  the  export  price  level  a  profit  on  exchange  accrues 
to  the  exporter.  But  the  depreciation  of  the  exchange  of  a  country 
raises  the  price  in  its  own  paper  money  of  imports  of  food  and  raw 
materials,  therefore  wages  and  other  costs  of  production  subse- 
quently rise  toward  the  world  level  and  this  profit  to  the  exporter 
diminishes.  The  equalization  of  price  levels  eliminates  the  self- 
correctives.  Until  the  stage  of  equilibrium  is  reached  the  fall  of 
the  exchange  is  a  burden  upon  the  less  mobile  factors  in  the  cost 
of  production,  such  as  rent,  overhead,  and  most  of  all  labor.  That 
is,  the  lag  in  the  rise  of  wages  below  the  rise  in  cost  of  living, 
which  depends  upon  imported  goods,  constitutes  a  profit  to  the 
exporter,  but  a  burden  to  the  wage  earner. 

(b)  Financial  Self-Correctives — 

The  depreciation  of  the  exchange  of  a  country  is  a  financial 
self-corrective  as  well.  It  induces  the  resale  of  its  holdings  of 
securities  of  other  countries  whose  exchange  is  not  depreciated. 
For  example,  when  sterling  depreciated  in  New  York,  English- 
men resold  their  holdings  of  dollar  securities  and  obtained  more 
sterling  than  they  loaned.  Of  course,  if  the  securities  were  pay- 
able not  in  dollars  but  in  sterling  this  effect  would  not  be  evident. 
Before  the  United  States  entered  the  war  this  method  of  correct- 
ing the  declining  exchanges  of  the  Allies  was  in  effect.  As  shown 
below  about  56  per  cent  cent  of  the  British  holdings  of  American 
railroad  securities  were  liquidated  in  New  York  between  January, 

"  For  fuller  discussion  see  article  by  John  H.  Williams,  Annals  of  the 
Academy  for  Political  and  Social  Science,  May,  1920,  pp.  200,  et  seq. 


PRINCIPLES   AND    PRACTICE   IN   THE   WORLD   WAR  337 

1915,  and  January,  1917.  During  the  period  of  our  belligerency 
the  United  States  government  advances  eliminated  the  need  for 
such  a  corrective.  But  after  the  release  of  the  "peg"  the  deprecia- 
tion of  sterling  in  New  York  induced  another  wave  of  selling, 
whereby  Britishers  obtained  a  premium  on  the  sale  of  the  inter- 
national securities,  the  stocks  and  bonds  listed  on  both  the  New 
York  and  European  stock  exchanges.  As  a  result  of  the  pressure 
of  sales  by  foreigners  in  the  New  York  market,  many  common 
stocks  which  had  a  long  unbroken  record  of  dividends  sold  at  far 
lower  prices  in  1920  than  at  quotations  during  19 14  or  even  the 
week  prior  to  America's  entry  into  the  war. 

The  depreciation  of  exchange  of  a  country  tends  to  make  it 
borrow  in  those  countries  whose  exchange  is  at  gold  parity.  The 
heavy  borrowings  during  19 19  and  1 920  by  the  countries  of 
Europe,  both  belligerent  and  neutral  in  the  World  War  furnish 
ample  evidence  of  this  tendency.  As  the  depreciation  of  exchange 
is  wiped  out  the  borrowers  profit  on  the  operation,  provided  the  loan 
was  made  in  the  currency  which  remained  at  gold  parity.  Further- 
more, the  investors  of  a  country  whose  exchange  is  at  gold  parity 
are  induced  to  buy  the  securities  or  the  currency  of  a  country 
where  exchange  is  depreciated  in  the  speculative  expectation  that 
exchange  will  rise  and  give  the  investor  a  larger  return  upon 
reconversion  into  his  own  currency.  Similarly  these  investors  will 
leave  their  bank  deposits  in  the  country  whose  currency  is  depre- 
ciated, and  will  sell  their  foreign  holdings,  bank  deposits  and 
short-term  bills  as  the  depreciated  currency  rises.  This  selling  has 
the  effect  of  checking  a  rise.  This  result  may  be  minimized  by  con- 
verting the  holdings  of  currency  or  of  short-term  bills  into  long- 
term  bonds,  whose  maturity  date  is  fixed  beyond  the  period  when 
the  exchanges  are  likely  to  be  in  acute  depreciation. 

ii.  Denial  of  the  Self-Corrective  Effects  of  Depreciated  Exchange 

(a)   Commercial — 

There  are  economists  who  hold  that  a  depreciating  exchange 
does  not  tend  to  correct  itself.  J.  M.  Keynes  did  not  find  that  a 
depreciated  exchange  acted  as  a  bounty  to  British  Indian  exporters. 
Again,  after  the  World  War  the  depreciating  exchange  In  Ger- 
many not  only  did  not  check  imports  but  it  stimulated  imports, 
even  of  luxuries.     The  champagne  purchases  during  1920  were 


338        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  largest  in  the  history  of  Germanj'.  The  Minister  of  Finance 
Herr  Wirth,  bewailed  the  huge  imports  of  chocolates,  wines  and 
other  articles  of  luxury.  This  extravagance,  however,  affected 
not  only  imports  but  also  articles  of  domestic  production.  Whether 
as  a  result  of  five  years  of  abstinence  and  restraint  or  of  the  rapidly 
diminishing  purchasing  power  of  the  mark,  luxuries  were  consumed 
in  great  quantities  and  display  was  rampant.  Again,  even  in  Great 
Britain  the  relatively  small  depreciation  of  sterling  did  not  check 
imports,  because  after  all  the  largest  share  of  the  imports  consisted 
of  goods  needed.  The  effect  of  depreciating  exchange  then  is 
merely  to  increase  the  cost  of  essential  imports. 

Again,  it  is  held  that  depreciating  exchange  does  not  stimulate 
exports,  because  as  the  exchange  depreciates  prices  within  the 
county  likewise  rise  to  the  world  price  level  and  thus  eliminate 
the  differential. 

(b)   Financial — 

There  are  similar  denials  that  a  depreciating  exchange  tends 
to  cause  borrowing  abroad  or  the  resale  of  holdings  of  securities 
of  countries  whose  currency  is  at  gold  parity.  According  to  news- 
paper despatches  ^^  French  investors  did  not  sell  dollar  securities 
in  order  to  get  more  francs  as  the  market  depreciated,  and  thus  by 
selling  dollars  or  buying  francs  to  correct  the  exchange.  Instead 
it  was  said  that  they  bought  dollar  securities,  and  sold  francs  on 
a  rapidly  depreciating  market.  Similarly  the  so-called  "flight  of 
capital"  from  Germany,  while  it  may  have  been  induced  by  oppres- 
sive tax  measures,  was  in  part  due  to  the  rapid  decline  in  value  of 
the  German  mark.  Germans  sold  marks  on  the  declining  market 
and  bought  the  currencies  of  neutral  countries  and  of  the  United 
States  in  order  to  arrest  the  continuous  diminution  of  their  wealth. 

The  marked  decline  of  the  Austrian  kronen  led  to  panic  sales 
of  kronen  and  to  the  purchase  of  foreign  securities.  As  a  result 
the  depreciated  kronen  declined  still  further.^^  The  purchase  of 
foreign  securities  is  not  confined  to  the  countries  where  the  cur- 
rency is  greatly  depreciated.  Even  Dutch  investors,  small  farmers 
as  well  as  city  capitalists'  bought  American  currency  and  securi* 
ties.^* 

'^Associated  Press,  March  22,  1919. 

"^  New  York  Times,  December  20,  1920. 

**  Dispatch  to  New  York  Times,  November  9,  1920. 


PRINCIPLES   AND  PRACTICE   IN   THE   WORLD   WAR  339 

iii.  Reconciliation  of  the  Apparently  Conflicting  Facts 

(a)  Commercial  vs.  Fiscal  Causes  of  Depreciation — - 

The  two  tendencies,  though  apparently  contradictory,  are  recon- 
cilable. If  the  depreciation  is  due  to  an  excess  of  imports  a  decline 
of  exchange  undoubtedly  has  an  effect  on  trade.  It  checks  imports 
and  stimulates  exports.  Likewise,  the  financial  effect  is  to  stimulate 
borrowing  in  the  country  whose  exchange  is  at  or  near  parity  and 
reselling  to  that  country  of  the  securities  issued  in  the  stable  cur- 
rency. If  however  the  depreciation  is  due  to  a  rapid  increase  in 
the  volume  of  the  currency  then  the  opposite  effects  are  noted. 
Imports,  particularly  of  luxury  articles,  are  accelerated. 

A  depreciating  currency  fosters  extravagance  because  holders 
wish  to  get  rid  of  it  before  it  rots  on  their  hands.  They  convert 
it  into  anything  which  depreciates  less  rapidly.  No  distinction  is 
made  between  domestic  goods  and  foreign  goods.  A  similar  finan- 
cial effect  follows.  Holders  of  a  rapidly  depreciating  currency 
will  invest  it  in  diamonds  bought  at  home  or  in  securities  bought 
abroad,  or  in  any  value,  domestic  or  foreign  which  will  not  waste 
away  as  rapidly  as  the  depreciating  currency. 

These  anomalous  phenomena  are  in  part  due  to  the  fact  that 
gold  is  not  publicly  and  freely  quoted  in  terms  of  depreciated 
paper,  and  that  the  flow  of  gold  as  a  corrective  of  the  exchange  is 
restricted.  The  wide  fluctuations  of  exchange,  the  unsettlement 
of  trade,  and  the  failure  of  a  depreciating  exchange  quickly  to 
correct  itself  are  the  price  that  the  governments  of  Europe  are 
paying  for  the  failure  to  recognize  a  premium  on  gold  and  to 
permit  gold  to  flow  freely. 

(b)  Relation  Between  Fall  of  Exchange  and  Rise  of  Prices — 
The  fall  in  exchange  rates  bears  a  close  relation  to  the  rise  in 

internal  prices.  The  foreign  exchange  value  of  the  depreciated 
currencies  and  the  rise  in  domestic  prices  both  indicate  the  lowered 
purchasing  power  of  paper  money.  The  foreigner  as  well  as  the 
native  makes  a  guess  as  to  the  diminution  in  value  of  depreciated 
paper  money.  The  experts  at  the  Brussels  Financial  Conference 
prepared  a  table  to  illustrate  the  relation  between  exchange  rates 
and  prices.  Since  the  United  States  is  a  free  gold  market,  prices 
in  the  United  States  may  be  regarded  as  gold  prices.  The  United 
States -index  number  of   1913  is  taken  as  a  basis  of   i(X>.     The 


340       INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 


Figure  XXI 

Movement  of  Foreign  Exchanges  on  New  York  and  of  Commodity 
Prices  in  Four  Countries 

Prices,  above  heavy  line,  based  on  1913  average  as  100.     Exchange  rates, 
below  heavy  line,  in  terms  of  depreciation  from  parity 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR 


341 


PERCENT 
DEPRECIATION 
0 


eo 

4-0 
60 
60' 

too 


:n^^. 

/ 
1 

X. 

PDRTH 

EXCHAN&E     / 
\SIN&  POWEEUD 

F  CIJRRFNCV  \ 

\_ 

'--^v^ 

> 

ITALY 

1917 


i9ia 


1919 


Figure  XXII 


I9Z0 


19^1 


Depreciation  of  Foreign  Exchange  from  Par  and  Depreciation  of  the 

Purchasing  Power  of  Foreign  Currencies  from  the 

Purchasing  Power  of  the  Dollar 

The  zero  line  represents  the  value  of  the  dollar  and  the  figures  for  ex- 
change and  purchasing  power  are  plotted  as  percentages  below 
full  dollar  value 


342        INTERNATIONAL   FINANCE   AJJD   ITS   REORGANIZATION 

relative  cost  of  dollars  in  foreign  currencies  is  based  on  gold  parity 
as  ICO.  The  external  price  index  of  the  several  countries  obtained 
by  multiplying  the  gold  price  index  in  the  United  States  by  the 
relative  cost  of  the  dollar  in  the  foreign  currency,  gives  the  relative 
cost  in  foreign  currency  of  American  commodities.  For  com- 
parison, there  is  given  the  domestic  price  or  the  cost  at  home  in 
:he  native  currency,  using  the  19 13  index  number  of  each  country 
as  a  base  of  100. 

The  table  indicates  that  both  the  domestic  price  level  and  the 
depreciation  of  the  exchange  rates  reflect  proportionately  the  depre- 
ciation of  the  currency.  Differences  existing  between  them  may 
be  due  to  the  differences  in  the  constituents  of  index  numbers,  the 
hoarding  of  notes,  etc. 

Comparison  of  the  Domestic  Purchasikg  Power  of  Certain  Currencies 
AND  Their  Purchasing  Power  in  the  United  States  " 


Country 


United 

States 

index 

number 

1913  =  100 


(a) 


Relative     cost 
of  dollars  in 
foreign    cur- 
rency. 
Parity =100 


(b) 


External  price. 
Cost  in  for- 
eign curren- 
cies of  com- 
modities in 
United 
States. 
1913  =  100 

(a)X{b)-^ioo 


Internal  price. 

Cost  at  home 

in    native 

currency. 

1913  =  100 

id) 


December,  1919 

Italy,  lire 

France,  francs 

United  Kingdom, 

sterling 

Sweden,  kroner. . . 
Canada,  dollars .  . 
Japan,  yen 

May,  1920 

Italy,  lire 

France,  francs 

United  Kingdom, 

sterling 

Sweden,  kroner. . . 
Canada,  dollars . . 
Japan,  yen 


238 
238 

238 
238 
238 
238 


26s 
265 

265 
265 
265 
265 


256 
210 

129 

125 

108 
99 


424 
319 

126 

125 
109 
100 


609 
499 

308 
298 
258 
23s 


1124 

845 

334 
331 

289 
265 


457 
425 

277 
317 
238 
289 


679 
553 

313 
354 
261 
301 


^  Currency  Statistics,  Paper  III  of  the  Brussels  Financial  Conference, 
Table  5,  p.  41. 


PRINCIPLES  AND  PRACTICE   IN  THE  WORLD  WAR  343 

The  tables  show  that  the  countries  ranged  in  series  under  column 
(c)  would  correspond  to  a  series  under  column  (d).  The  country 
with  the  highest  rise  of  internal  prices  likewise  shows  the  greatest 
depreciation  of  exchange.  In  general  external  prices  rise  higher 
than  domestic  prices  where  gold  does  not  flow^  freely.  This  means 
that  the  exporter  who  bought  at  the  domestic  price  level  and  sold 
abroad  at  the  higher  foreign  price  level  enjoyed  the  so-called 
"bounty"  resulting  from  depreciating  exchange.  However  in  the 
two  countries,  Japan  and  Sweden,  which  did  not  restrict  the 
movement  of  gold  after  the  war,  external  prices  rose  less  than 
internal  prices.  Or  the  depreciation  of  exchange  rates  was  less 
than  the  decline  of  the  purchasing  power  at  home. 

iv.  The  Unsettling  Effect  of  Unstable  Exchange  Rates 

(a)  Commercial — 

The  rapid  and  extreme  fluctuations  of  exchange  made  foreign 
trade  operations  highly  speculative.  To  eliminate  the  element  of 
unstable  rates,  traders  reverted  to  barter.  For  instance,  France, 
traded  coal  from  the  Saar  Basin  for  a  variety  of  German  products. 
Similarly  Belgium  and  Rumania  traded  coal  for  corn.  Great 
Britain  and  Czecho-Slovakia  traded  coal  for  enamelware.  In  these 
transactions  no  monetary  unit  was  taken  into  account,  a  specific 
quantity  of  one  commodity  was  exchanged  for  a  specific  quantity 
of  the  other. 

Raw  materials  were  also  bartered  for  the  resulting  finished 
goods.  This  so-called  "refining  trade"  was  part  of  a  credit  scheme 
under  which  raw  materials  would  be  shipped  to  Germany.  The 
foreigner  furnishing  them  would  retain  a  lien  on  the  goods  in 
process  which  became  increasingly  valuable  and  thus  added  to  the 
security. 

(b)  Financial — 

The  depreciation  of  the  foreign  exchanges  in  New  York 
unsettled  the  international  market  for  securities.  As  the  exchanges 
of  the  countries  of  Europe  declined  their  internal  loans  held  in 
the  United  States  fell  in  value.  Interest  in  the  depreciating  cur- 
rency was  collectible  in  dollars  only  at  a  considerable  loss.  In 
many  cases  it  was  not  immediately  converted  into  dollars  but 
remained   as  a   floating   debt,   usually  converted  on  a  temporary 


344        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

rise  in  the  exchange  market  and  thus  checking  the  improvement. 
The  risks  of  further  declines  in  exchange  discouraged  American 
investments  in  internal  loans  of  the  European  governments.  To 
avoid  this  difficulty  foreign  governments  floated  loans  at  high  rates 
of  interest,  payable  in  dollars,  or  in  a  few  cases  payable  at  the 
option  of  the  holder  either  in  dollars  or  in  the  foreign  currency, 
at  a  graduated  percentage  of  the  improved  value  of  the  exchange. 

V.   The  Increased  Importance  of  Dollar  Exchange 

Dollar  exchange  increased  in  importance  because  the  United 
States  became  now  the  chief  free  gold  market  of  the  world. 
Therefore  the  depreciation  of  the  exchanges  in  New  York  was  a 
measure  of  the  discount  on  paper  money  or  the  premium  on  gold. 

(a)  Wider  Arbitrage  Transactions — 

Before  August,  1914,  the  arbitrage  operations  of  American 
dealers  in  foreign  exchange  were  confined  practically  to  the  three 
principal  currencies  of  Europe,  sterling,  francs,  and  marks.  Other 
exchange  was  purchased  almost  entirely  through  London.  Since 
the  war  American  dealers  in  foreign  exchange  have  conducted 
arbitrage  operations  with  practically  every  country  in  the  world. 

(b)  Development  of  Dollar  Exchange  ^^ — 

Another  indication  of  the  growth  of  dollar  exchange  is  the 
huge  volume  of  transactions  in  dollars.  From  February  20,  191 8, 
to  December  31,  19 18,  the  dollar  exchange  furnished  on  Allied 
account  amounted  to  $26,000  million,  due  chiefly  to  United  States 
government  loans.  The  aggregate  debits  and  credits  in  dollar 
exchange  operations  with  European  countries,  other  than  the  Allies, 
was  about  $2500  million,  with  countries  in  Asia  $2800  million, 
with  countries  of  South  America  $1900  million,  with  Central 
America,  Mexico  and  the  West  Indies  $2300  million.  Many 
countries  bought  goods  in  the  United  States  with  dollars  accumu- 
lated here  rather  than  with  sterling,  as  before  the  war.  Many 
of  these  transactions  represented  the  purchase  and  sale  of  securities 
in  the  United  States  for  the  account  of  foreigners.  Furthermore, 
as  the  neutral  countries  accumulated  balances  in  the  United  States 
which  could  not  be  liquidated  through  the  exportation  of  gold 
during    the    embargo    they    purchased    foreign    securities,    chiefly 

"Annual  report  of  Federal  Reserve  Board  for  the  year  1918,  p.  56. 


PRINCIPLES   AND  PRACTICE  IN  THE  WORLD  WAR  34$ 

British.  Purchases  of  securities  in  the  United  States  for  foreign 
account  in  the  ten  months  ending  December  31,  191 8,  totaled 
about  $400  million,  and  the  sales  for  foreign  account  about  $350 
million.  The  excess  of  purchases  over  sales  were  of  American, 
British  and  French  securities.  At  the  end  of  the  year  the  securities 
held  in  America  for  foreign  account  amounted  to  $1800  million 
and  the  securities  held  abroad  for  American  account  amounted  to 
$97  million. 

E.  The  Correctives  of  Foreign  Exchange 

The  several  factors  which  tend  to  correct  depreciated  exchange, 
according  to  economic  theory,  were  operative  during  the  war. 
From  January,  1915,  to  June,  1917,  Europe  shipped  gold  to  the 
United  States  aggregating  $1255  million.  Again,  Europe  resold 
to  the  United  States  securities  which  had  been  exported  before 
the  war.  The  amounts  resold  were  estimated  at  about  $2000 
million.  Again,  loans  both  secured  and  unsecured  amounting  to 
about  $2800  million  were  raised  by  the  Allied  Powers  to  pay  for 
their  excess  of  imports  and  thus  to  correct  their  exchanges.  Finally, 
after  April,  191 7,  the  United  States  government  extended  advances 
totaling  about  $9500  million.  To  help  control  the  daily  fluctua- 
tions in  the  market  a  fund  of  about  $50  million  was  made  avail- 
able in  London  by  a  group  of  New  York  bankers. 

i.  Commodity  Movements 

(a)    During  the  War — 

After  the  entry  of  the  United  States  into  the  war  It  became 
necessary  to  maintain  the  purchasing  power  of  the  Allied  govern- 
ments in  the  United  States,  and  in  the  neutral  markets  of  the 
world.  Although  the  United  States  Treasury  did  not  take  any 
steps  in  the  actual  support  of  sterling,  francs  and  lire  in  New 
York  it  maintained  a  sympathetic  attitude  toward  the  "pegging" 
operation.  As  a  result  of  inter-Allied  financial  unity  the  excess 
of  exports  of  the  United  States  was  no  longer  the  chief  factor 
in  determining  the  position  of  the  dollar  on  the  markets  of  the 
world.  The  Allied  and  Associated  Powers,  the  United  States, 
Great  Britain,  France,  and  Italy,  had  effected  a  financial  unity 
and  their  several  exchanges  were  determined  no  longer  by  the 
factors  affecting  each  individual  country,  but  by  the  sum  total 


346        INTERNATIONAL    flNANCE    AND    ITS    REOKGANIZATION 


of  the  international  debits  and  credits  affecting  the  entire  group. 
The  dollar  depreciated  sympathetically  with  the  Allied  currencies. 
Normally  the  exchanges  would  have  corrected  themselves  by 
stimulating  exports  and  checking  imports.  But  commercial  con- 
siderations had  to  yield  to  military  necessity  and  as  a  result  the 
normal  correctives  were  not  operative.  The  need  for  shipping 
facilities  in  the  Atlantic  lanes,  the  blockade  of  the  Central  Powers 
and  of  the  neighboring  neutrals,  made  international  trade  settle- 
ments difficult.  As  a  result  of  the  inter-Allied  financial  unity 
the  balancing  of  their  international  debits  by  means  of  exports 
was  equally  effective  in  stabilizing  dollar  or  sterling  exchange, 
whether  these  exports  were  made  by  the  United  States  or  by  any 
Allied  power.  But  the  need  for  tonnage  to  carry  war  supplies 
from  the  United  States  made  it  difficult  to  provide  additional 
shipping  for  non-military  supplies  to  those  European  neutrals 
that  had  no  tonnage  of  their  own.  Although  the  Allied  powers 
were  importing  vastly  more  than  they  were  exporting  and  there- 
fore they  had  ample  tonnage  for  such  exports  as  they  were  able 
to  make,  yet  the  blockade  of  the  enemy  powers  restricted  exports 
to  the  neighboring  neutrals.  On  the  other  hand  exports  to  distant 
parts  of  the  world  was  made  difficult  by  the  general  shortage  of 
tonnage,^'^  Therefore,  the  flow  of  commodities  could  not  correct 
the  depreciated  exchange  of  the  Allies. 

(b)   After  the  War — 

The  release  of  the  "peg"  disrupted  the  inter-Allied  unity.  As 
a  result  the  monthly  returns  for  the  powers  that  had  a  large 
excess  of  imports  during  191 9  showed  a  gradual  decrease  during 
1920,  The  excess  of  imports  from  the  United  States  into  four 
formerly  belligerent  countries  of  Europe  for  the  years  1913,  1918, 
1919  and  1920  was  as  follows: 

Excess  of  Imports  from  the  United  States 
(in  million  dollars) 


Country 


1920 


1919 


1918 


1913 


United  Kingdon. 

France 

Italy 

Belgium 


1311 
510 
296 
23s 


1069 
770 
384 
370 


1913 
872 
468 
15s 


319 
15 
23 
23 


Report  of  the  Secretary  of  the  Treasury  for  the  year  1918,  p.  38, 


PRINCIPLES    AND   PRACTICE   IN   THE   WORLD   WAR 


347 


When  the  United  States  loans  were  discontinued  the  nations 
of  Europe  could  no  longer  settle  for  their  excess  of  imports  by 
borrowing.  They  had  to  settle  for  it  by  exports.  And  in  a  large 
measure  they  did. 

ii.  Flow  of  Gold 

(a)  Prior  to   the   War — 

A  study  of  the  balance  of  trade  of  the  United  States  shows 
that  gold  flows  into  a  country  in  settlement  of  its  international 
credits,  and  that  gold  flows  out  of  a  country  in  settlement  of  its 
international  debits.  The  gold  flow,  however,  does  not  exactly 
balance  the  flow  of  commodities.  Other  relevant  factors  are 
shipping,  interest  on  invested  capital,  and  the  minor  items  in  the 
international  balance. 


The  Balance  of  Shtpments  of  Merchandise  and  Gold  ^ 
(in  million  dollars) 

Period 

Excess  of  Merchandise 

Excess  of  Gold 

Exports 

Imports 

Exports 

Imports 

1821-1837 

34 

2493 
9262 

185 
1541 

37 
36 

18^8-1840 

1850-1873 

1098 

202 

1874-1895 

1806— IQ14. 

174 

If  the  only  factors  in  international  trade  were  merchandise 
and  gold,  an  excess  of  exports  of  merchandise  would  be  balanced 
by  an  excess  of  imports  of  gold.  However,  in  the  period  1 821-1837 
our  net  imports  were  more  than  offset  by  our  shipping  earnings, 
therefore  our  international  balance  on  this  account  was  liquidated 
by  net  imports  of  gold.  In  the  period  1 838-1 849  net  merchandise 
exports  were  offset  by  net  gold  imports,  and  in  the  following 
period  merchandise  imports  were  offset  by  gold  exports.  In  the 
period  1 874-1 895  there  was  an  excess  of  exports  of  commodities 
and  instead  of  net  imports  of  gold  we  had  net  exports,  which  paid 
for  interest  and  principal  of  the  growing  debt  of  the  United  States 
to  Europe.  In  the  period  1 895-1914  there  was  a  very  large  excess 
of  merchandise  exports  and   only  very  small   offsetting  net  gold 

**  Balance  of  Trade  of  the  United  States,  by  Bullock  et  al. 


348 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


imports,  the  difference  being  settled  by  debits  of  the  United  States 
for  services,  such  as  shipping  and  banking,  by  immigrants'  remft- 
tances,  and  by  the  expenditures  for  travel  of  growling  numbers  of 
Americans. 

(b)  Flow  of  Gold  During  the  War — 

The  imports  and  exports  of  gold,  both  by  years  and  by  months 
during  the  period  1914-1918  are  particularly  significant  in  connec- 
tion with  the  exchanges. 

United  States  Gold  Movements  by  Years  '' 
(in  million  dollars) 


Year 


Exports 


Imports 


Excess  of 
exports 


Excess  of 
imports 


Fiscal  year: 

1914 

191S 

1916 

1917 

Total  July  i,  1914-June  30,  191 7. 

1918 

Calendar  year: 

1918 

1919 

1920 

Totals  from  Aug.  i,  1914 — 

To  Nov.  10,  1918 

To  Dec.  31,  1918 

To  Dec.  31,  1920 


112 

146 

90 

292 


67 
171 
494 
977 


45 


25 
404 
685 


640 

190 

41 
368 
322 


703 

705 

139s 


1709 

124 

62 

76 

429 


1773 
1776 
2282 


45 
66 


292 


1114 


21 
107 


1070 

1071 

886 


I.  Before  the  belligerency  of  the  United  States — For 
the  purpose  of  studying  the  flow  of  gold  the  period  of  the  war 
must  be  divided  into  two,  namely:  the  period  before  the  century  of 
the  United  States  and  the  period  of  its  belligerency.  From  July 
I,  1914,  to  June  30,  1917,  three  fiscal  years,  the  United  States 
imported  net  $1114  million  in  gold.  The  gold  came  from  Europe, 
chiefly  the  belligerent  Allies  who  had  to  settle  for  their  excess  of 
imports  not  only  with  the  United  States  but  also  with  the  neutrals 
of  Europe.  These  countries,  like  the  United  States,  also  had  large 
net  gold'  imports. 

*^U.  S.  Statistical  Abstract,  1919. 

Federal  Reserve  Bulletin,  November,  1920. 


PRINCIPLES   AND  PRACTICE   IN  THE   WORLD   WAR 


349 


Monthly  Gold  Movements  in  the  United  States  Showing  Net  Excess 
OF  Imports  and  Exports 

(in  million  dollars) 

Source:  Monthly  Summary  of  Foreign  Commerce,  December,  1914-1919 


Month 


January 

February 

March 

April 

May 

June 

July 

August 

September 

October 

November 

December 

Total 

Year's  excess 

January 

February 

March 

April 

May 

June 

July 

August 

September 

October 

November 

December 

Total 

Year's  excess 


Net  Excess  of- 


Exports    Imports 


1914 


5 
3 

IS 

44 

30 

IS 

19 

44 
7 


180 
164 


16 


1917 


38 

82 

122 

IS 

24 


42 

27 

27 

7 

4 


114 


281 
167 


Net  Excess  of — 


Exports 


Imports 


191S 


12 
25 
IS 
30 
50 
IS 

60 
40 

77 
57 
34 

421 
421 


1918 


3 
29 


33 
21 


Net  Excess  of- 


Exports 


Imports 


1916 


14 


IS 

114 

53 

-29 

86 

90 

21 

131 

S44 

S30 


1919 


I 
S7 
53 
43 
28 

39 
49 
33 

304 

292 


35©        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

After  the  entry  of  the  United  States  into  the  war,  the  govern- 
ment advanced  credit  to  the  Allies.  These  advances  obviated  the 
need  for  further  gold  imports  from  the  Allied  Powers  in  settle- 
ment of  huge  balances  of  exports  from  the  United  States.  During 
the  stabilization  of  the  Allied  exchanges,  the  neutrals  of  Europe 
tried  to  settle  their  debits  against  the  Allied  Powers  in  the  New 
York  exchange  market.  As  a  result  the  neutrals  were  able  to  draw 
gold  from  New  York  in  settlement  of  their  excess  of  exports  to 
the  Allied  Powers.  During  the  three  months  Jul}',  August  and 
September,  191 7,  the  neutrals  withdrew  about  $100  million  in 
gold  from  New  York,  and  thus  compelled  the  United  States  to 
declare  an  embargo  on  gold  exports. 

2.  The  flow  of  gold  under  the  embargo — The  flow  of 
gold  to  New  York,  which  had  been  fairly  continuous  until  the 
early  months  of  19 17,  slackened  then.  The  Allied  Powers  had 
exported  so  much  gold  in  settlement  of  their  adverse  balances  of 
trade  that  they  restricted  the  movement  of  gold,  and  thereupon 
gold  withdrawals  for  Allied  account  narrowed  down  to  the  United 
States  market.  Because  of  the  resulting  heavy  withdrawal  of  gold 
the  President  on  September  7,  191 7,  issued  a  proclamation  that 
"except  at  such  times  and  under  such  regulations  and  subject  to 
such  limitations  and  exceptions  as  the  President  shall  prescribe 
and  until  ordered  otherwise  by  the  President  or  Congress  the 
following  articles,  namely:  coin,  bullion  and  currency,  shall  not 
on  and  after  September  10,  191 7,  be  exported  from,  shipped  from 
or  taken  out  of  the  United  States  or  its  territorial  possessions."""-' 

The  Federal  Reserve  Board  issued  regulations  and  considered 
applications  governing  the  exportation  of  coin,  bullion  and  cur- 
rency. Travelers  leaving  the  country  w&re  permitted  to  take  with 
them  United  States  paper  currency,  other  than  gold  or  silver  cer- 
tificates to  the  amount  of  $1000  per  adult,  $100  in  silver  coin  in 
lieu  of  an  equal  amount  of  notes,  and  gold  coin  or  gold  certificates 
to  the  amount  of  $200.  The  prime  reason  for  the  regulations  was 
the  belief  that  United  States  currency  taken  into  foreign  countries 
by  travelers  would  be  absorbed  by  enemy  agents  for  propaganda 
purposes.*^  Applications  for  the  shipment  of  gold  to  the  neutral 
countries  of  Europe  were  refused.     However  in  order  to  obtain 


**  Report  of  the  Federal  Reserve  Board  for  1917,  p.  20. 
*^  Annual  Report  of  the  Federal  Reserve  Board  for  1918,  p. 


36. 


PRINCIPLES    AND   PRACTICE    IN   THE   WORLD   WAR  35 1 

necessary  raw  materials  from  Mexico,  South  America  and  the  Far 
East  the  Board  granted  permission  to  ship  gold  if  the  imports  were 
essential  to  the  prosecution  of  the  war.  In  other  words,  military 
and  not  commercial  considerations  determined  the  flow  of  gold. 

The  embargo  on  gold  removed  one  of  the  important  correctives 
of  the  exchanges  and  as  a  result  there  was  a  marked  depreciation  of 
the  dollar  on  those  markets  with  respect  to  which  the  embargo  was 
rigidly  enforced,  and  which  held  large  balances  of  Allied  exchange. 
Again  the  embargo  increased  the  gold  reserve,  and  eased  the  credit 
situation  in  the  United  States.  The  resulting  great  expansion  made 
the  later  deflation  in  1920  very  acute.  The  embargo  restricted 
the  movement  for  the  extension  of  American  banking  abroad.  Of 
course  American  trade  was  restricted.  These,  however,  were  minor 
considerations  in  view  of  the  one  outstanding  need,  a  military 
victory. 

The  net  exports  during  the  period  of  the  embargo  from 
October,  1917,  to  May,  1919,  were  only  $18  million.  The  gross 
exports  of  coin,  bullion  and  currency  under  licenses  granted  by  the 
Federal  Reserve  Board  from  September  7,  1917,  to  June  7,  1919, 
amounted  to  about  $863  million. 

Gold $152,326,976.37 

Silver 502,756,003.44 

U.  S.  currency 166,780,636.  72 

Currency  of  the  countr}^  to  which  exported. . . .       28,762,254.  27 
Other  currency 12,627,800.05 

Total $863,253,670.85 

Of  the  total  amount  of  gold  licensed  $48  million  was  exported 
to  Mexico,  $17  million  to  Argentina,  $16  million  to  Chile,  $13 
million  to  Colombia,  and  lesser  amounts  to  Venezuela,  Peru,  Spain, 
India,  Java  and  Japan.  Of  the  total  amount  of  silver  licensed 
$339  rnillion  was  exported  to  India,  $62  million  to  China  and 
lesser  amounts  to  Great  Britain,  France,  Canada  and  Mexico.  Of 
United  States  currency  licensed  $49  million  was  exported  to 
France,  and  lesser  amounts  to  other  countries. 

(c)    The  Flow  of  Gold  After  the  War— 

1.  Lifting  of  the  embargo — On  March  i8,  1919,  Great 
Britain  ceased  to  support  franc  rates  in  London.  On  March  20, 
Great  Britain  instructed  J.  P.  Morgan  &  Company  to  cease  sup- 


352        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

porting  sterling  in  New  York.  A  few  days  later  the  support  of 
lire  in  New  York  was  abandoned.  These  steps  relieved  the  pres- 
sure which  was  being  exercised  on  New  York  by  the  neutrals 
who  had  exchange  of  the  Allied  Powers  to  sell.  The  removal  of 
the  "peg"  tended  to  restore  the  normal  conditions  under  which 
each  country  settles  for  its  own  trade  balances.  Accordingly  the 
Federal  Reserve  Board  announced  that  after  May  6,  191 9,  licenses 
for  gold  exports  would  be  granted  freely,  and  that  after  June 
9,  1919,  the  control  of  exchange  and  the  embargo  on  gold  would 
be  terminated  with  minor  exceptions.  The  embargo  on  gold  ex- 
ports to  Bolshevik  Russia  was  lifted  in  December,  1920. 

2.    The    EFFECTS    OF    THE    LIFTING    OF    THE    EMBARGO — As    a 

result  of  the  lifting  of  the  embargo  there  was  a  very  large  outflow 
of  gold  during  the  rest  of  1 919,  averaging  about  $40  million  per 
month.  From  June  to  December  $290  million  in  gold  were  ex- 
ported in  settlement  of  the  huge  balances  against  us  which  had  ac- 
cumulated in  the  neutral  countries.  Prior  to  the  removal  of  the 
"peg"  the  neutrals  had  exchanged  their  sterling,  francs,  and  lire 
for  dollars,  which  they  held  in  the  expectation  of  getting  gold. 
Again,  a  large  portion  of  this  gold  was  sent  to  South  America  and 
the  Far  East  to  pay  for  imports,  which  were  restricted  during  the 
war  but  which  were  greatly  needed  in  the  United  States.  Because 
of  this  accumulated  demand  the  United  States  had  an  excess  of 
imports  in  its  trade  with  South  America  and  the  Far  East.  From 
January  i,  to  November  10,  1920,  the  net  gold  imports  were 
small,  about  $107  million,  although  the  gross  exports  totaled  over 
$428  million.  The  imports  of  gold  came  chiefly  from  the  countries 
in  the  trade  with  which  the  United  States  had  an  excess  of  exports. 
During  1920  the  United  Kingdom  shipped  in  gold  $275  million, 
Canda  $35  million,  France  $49  million.  Our  outflowing  gold  was 
exported  to  the  countries  in  the  trade  with  which  the  United  States 
had  an  excess  of  imports.  Argentina  received  $90  million,  Japan 
$101  million,  China  $28  million.  Much  of  the  gold  imported  into 
the  United  States  was  en  route  to  foreign  countries  to  pay  the 
debts  of  the  country  from  which  the  gold  came  originally.  France, 
Italy  and  Great  Britain  shipped  gold  from  the  United  States  to 
settle  for  their  excess  of  imports  from  other  countries.  The  United 
States  thus  lost  gold  not  only  on  account  of  its  own  excess  of  im- 
ports from  certain  foreign  countries  but  also  on  account  of  arbitrage 


PRINCIPLES   AND  PRACTICE  IN  THE   WORLD  WAR  353 

transactions.  For  instance,  if  in  France  or  Italy  dollars  were 
cheaper  than  another  currency  for  which  there  was  a  demand,  it 
was  profitable  to  buy  gold  with  the  cheaper  currency,  dollars,  and 
send  it  to  the  country  whose  currency  was  dearer  in  France  or 
Italy.  The  trade  returns  for  commodities  and  gold  illustrate  this. 
In  1920  there  was  an  excess  of  commodity  exports  of  the  United 
States  to  Argentina  amounting  to  $6  million;  nevertheless  there 
was  an  excess  of  exports  of  gold  from  the  United  States  to  Argen- 
tina of  $88.2  million.  The  excess  of  commodity  imports  of  the 
United  States  from  Japan  in  1920  was  $36.7  million  and  the  ex- 
cess of  exports  of  gold  was  $101.3  million.  Part  of  the  excess  of 
exports  of  gold  from  the  United  States  may  have  been  used  to  pay 
British  and  French  balances  in  Argentina  and  Japan.  The  United 
States  may  have  exported  gold  in  settlement  of  accumulated  dollar 
balances  or  maturing  dollar  debts. 

As  a  result  of  the  lifting  of  the  embargo,  the  corrective  effect 
of  the  flow  of  gold  again  became  apparent,  and  the  dollar  rose  on 
all  the  markets  where  it  had  been  artificially  depressed  by  reason 
of  the  inter-Allied  financial  unity.  However,  it  did  not  rise  to 
the  same  extent  in  those  markets  in  which  the  United  States  had 
an  excess  of  imports. 


iii.  The  Resale  of  American  Securities 

One  of  the  large  factors  in  correcting  the  depreciation  of  the 
Allied  exchanges  was  the  resale  of  American  securities  which  had 
accumulated  in  Europe  since  the  Civil  War.  About  $2000  million 
of  American  securities  were  returned  from  August,  1914,  to  April, 
1917- 

(a)  Railroad  Shares — 

Mr.  L.  F.  Loree,  President  of  the  Delaware  and  Hudson  Com- 
pany, investigated  all  the  144  American  railroads  owning  more 
than  100  miles  of  line,  105  of  which  reported  securities  held 
abroad.  From  January  31,  1915,  to  January  31,  1917,  $1,518,- 
590,878  par  value  of  American  securities  were  returned,  or  56.15 
per  cent  of  the  total  holdings  on  the  earlier  date,  which  amounted 
to  $2,704,402,364.  In  the  half  year  ending  July  31,  1915,  17.78 
per  cent  were  returned,  in  the  year  ending  July  31,  19 16,  29.88 


354        INTERNATIONAL    FINANCE    AKD   ITS    REORGANIZATION 

per  cent,  and  in  the  half  year  ending  January  31,  1917,  8.49  per 
cent  of  the  holdings  on  January  31,  191 5,  were  returned.  In 
other  words  the  return  flow  of  these  securities  to  the  United  States 
declined  slowly  during  the  two  years. 

It  is  unfortunate  that  Mr.  Loree  did  not  continue  his  in- 
vestigation through  the  period  of  our  belligerency,  when  United 
States  government  advances  made  it  unnecessary  for  Europe  to  con- 
tinue to  sell  its  foreign  holdings.  Several  isolated  cases,  however, 
indicate  that  after  the  cessation  of  government  advances,  and  the 
release  of  the  "peg,"  the  sale  of  American  securities  by  Europe  was 
resumed  on  a  small  scale  only.  Pennsylvania  Railroad  common 
shares  were  held  in  Europe  before  the  war  to  the  extent  of  $75,- 
350.000.  By  September  30,  1919,  there  were  returned  $64,800,000, 
or  87.1  per  cent  of  the  above  amount.  However,  in  the  11  months 
following  the  signing  of  the  armistice  the  sales  amounted  to  only 
$150,000  par  value.  During  19 17  the  reduction  in  the  percentage 
of  railroad  stock  held  in  Europe  at  the  outbreak  of  the  war  aver- 
aged 22  per  cent.  Between  November  i,  191 6,  and  January  i, 
1 91 8,  the  reduction  from  the  amount  held  on  the  earlier  date  was 
as  follows:  Pennsylvania  43  per  cent,  New  York  Central  35  per 


FoiuEiGN  Held  Securities  of  the  New  York  Central  Railroad  Company*^ 

Bonds  and  Obligations  of  New  York  Central  Railroad  and  Leased  Lines 


Date 

Amount  in 
thousand  dollars 

Relative 
figures 

Percentage  of 
total  outstanding 

August  I,  1914 

February  i,  1917 

February  i, 1919. . . • 
July  I,  1920 

121,871 
31,002 
32,277 
23,207 

100. 0 
25 -4 
26.8 
18.3 

18.09 
4.12 
4.21 
304 

Capital  Stock  of  New  York  Central  Railroad  Cotnpany 


"By  courtesy  of  M.  S.  Barger,  General  Treasurer  of  the  New  York 
Central  Railroad  Co. 


PRINCIPLES   AND   PRACTICE   IN    THE   WORLD   WAR  355 

cent,  Baltimore  &  Ohio  35  per  cent,  Illinois  Central  24  per  cent. 
On  January  i,  19 18,  the  percentage  of  foreign-owned  stocks  re- 
turned since  191 5  was  very  large  in  the  case  of  a  number  of  roads: 
Pennsylvania  85  per  cent,  New  York  Central  80  per  cent,  Northern 
Pacific  70  per  cent,  and  Ilh'nois  Central  65  per  cent.^s 

The  New  York  Central  Railroad  Company  and  leased  lines 
kept  a  record  of  the  holdings  of  its  bonds  and  stocks  by  Europe 
and  British  possessions.  The  tabulation  shows  a  heavy  liquidation 
from  the  beginning  of  the  war  up  to  the  entry  of  the  United  States. 
There  was  comparatively  little  liquidation  during  the  period  of  the 
war, — in  fact  the  European  holdings  of  New  York  Central  bonds 
increased,  due  to  the  purchase  by  Scandinavian  neutrals.  After 
the  release  of  the  "peg"  in  the  early  part  of  1919  liquidation  of  the 
remainder  continued,  at  a  rapid  rate. 

(b)  Industrial  Securities — 

No  similar  investigation  with  reference  to  the  liquidation  of  In- 
dustrial securities  was  conducted.  The  report  of  the  British  Dollar 
Securities  Committee  gives  no  clue.  Professor  Bullock  and  associ- 
ates estimate  that  $304  million  of  industrial  securities  were  re- 
turned up  to  January  i,  19 17,  assuming  that  the  original  figure, 
used  by  him  and  compiled  by  The  Annalist  is  correct,  and  assuming 
that  the  rate  of  return  of  industrial  securities  was  the  same  as  that 
of  the  railroads. 

The  figures  for  the  United  States  Steel  Corporation,  however, 
show  a  variation  in  the  rate  of  return  of  common  stock  held  in 
Europe.** 

On  June  30,  1914,  there  were  1,274,247  shares  of  United 
States  Steel  common  held  abroad.  This  constituted  25.07  per 
cent  of  the  total  amount  outstanding.  From  July  i,  191 4,  to 
April  I,  191 7,  779,909  shares  were  returned  or  61.3  per  cent  of 
the  amount  held  abroad  before  the  war.  From  April  i,  19 1 7,  to 
December  31,  191 8,  when  United  States  government  advances 
helped  to  stabilize  sterling,  only  2758  shares  were  returned,  or 
0.2  per  cent  of  the  total  amount  held  in  Europe  at  the  outbreak 
of  the  war.  From  January  i,  1919,  to  June  30,  1920,  during  a 
large  part  of  which  period  the  "peg"  was  released,  and  gold  flowed 

■"Wall  Street  Journal,  January  9,  1918. 

"  Report  of  the  United  States  Steel  Corporation  for  the  quarter  ending 
June  30,  1920. 


356        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

freely  and  exchange  truly  indicated  international  balances,  the 
amount  of  common  stock  returned  rose  again.  In  that  period  of 
lYz  years  149,013  shares  were  returned,  or  about  11.7  per  cent  of 
the  total  amount  held  abroad  at  the  outbreak  of  the  war.  The 
foreign  holdings  of  the  United  States  Steel  Corporation  on  June 
30,  1920,  amounted  to  342,567  shares  or  26.8  per  cent  of  the 
amount  held  abroad  at  the  beginning  of  the  war.  Analysis  of  the 
foreign  holdings  of  preferred  stock  shows  a  similar  though  less 
striking  record. 

The  following  table  shows  the  great  extent  of  the  liquidation 
prior  to  the  advances  by  the  United  States  government  in  1917, 
the  absence  of  selling  during  the  period  of  these  advances,  and  the 
resumption  of  liquidation  after  the  "peg"  was  released  in  March, 
1919.  The  dates  respectively  indicate  holdings  at  the  outbreak  of 
the  war,  at  the  entry  of  the  United  States,  at  the  armistice,  at  the 
release  of  the  "peg,"  and  lYz  years  later. 


Foreign  Holdings  of  United  States  Steel  Shares  ^ 


Common 

Preferred 

Date 

Number 
of  shares 

Relative 
figures 

Number 
of  shares 

Relative 
figures 

Tune  ^0,  1914 

1,274,247 
494,338 
491,580 
493,552 
323,438 

100. 0 
38.8 

38. s 

38.7 
25-3 

312,311 

151,757 
148,225 

149,832 

Il8,2I2 

100  0 

March  31,  1917 

48.6 

47-4 
48.0 
37.8 

December  31,  1918 

March  31,  1919 

September  30,  1920 

The  foreign  holdings  of  the  American  Telephone  &  Telegraph 
shares  show  similar  results.  Between  June  30,  19 14,  and 
March  31,  1917,  about  35.8  per  cent  of  the  pre-war  holdings  of 
the  stock  was  sold  and  72.8  per  cent  of  the  New  York  Telephone 
Company's  First  and  General  Mortgage  45^ 's.  From  March, 
1917,  to  March,  1919,  during  the  period  in  which  sterling  was 
stabilized,  the  changes  were  slight.  European  holdings  of  the 
stock  increased  1.6  per  cent  and  European  holdings  of  the  bonds 
decreased  2.5  per  cent.  Betw^een  March,  1919,  and  September, 
1920,  the  selling  was  resumed  and  Europeans  sold  1 5.7  per  cent 

"  From  quarterly  reports  of  the  company. 


PRINCIPLES    AND   PRACTICE   IN   THE   WORLD   WAR 


357 


of  their  pre-war  holdings  of  the  stock  and  4.1   per  cent  of  their 
holdings  of  the  bonds. 

Foreign  Holdings  of  American  Telephone  and  Telegraph  Securities  *^^ 


American  T.  &  T. 
Stock 

N.  Y.  Tel.  Co.,  ist 

and  Genl.  Mtge.  4|'s 

Date 

Par- 
amount 
in  thousand 
dollars 

Relative 
figures 

Par- 
amount 
in  thousand 
dollars 

Relative 
figures 

Tune  ■?o,  1014. 

13,894 
8,916 
9,069 
9,150 

6,956 

100. 0 
64.  2 

65 -3 
65.8 

50.60 

36,316 
9,867 
8,968 

8,896 

7,356 

100. 0 

March  31,  1917 

27.2 
24.7 

December  31,  1918 

March  14,  1919 

March  31,  1920 

24-5 

September  20,  1920 

September  30,  1920 

20.6 

The  self-corrective  effect  of  depreciated  exchange  is  shown  in 
the  large  percentage  of  the  European  holdings  of  American  securi- 
ties resold  during  the  war.  The  shares  of  the  porphyry  copper 
companies  returned  between  July  i,  191 4,  and  December,  19 1 7, 
constituted  almost  50  per  cent  of  the  foreign  holdings  at  the  earlier 
date.  Of  the  shares  of  Utah  59  per  cent  were  returned,  of  Chino 
52  per  cent  and  of  Ray  30  per  cent.**^  During  1917,  probably  in 
the  early  part  of  the  year,  before  the  United  States  entered  the 
war,  29  per  cent  of  the  foreign  holdings  of  American  Smelting 
common  were  returned.*^ 


iv.  Sales  of  European  Securities 

In  addition  to  the  liquidation  of  European  holdings  of  Ameri- 
can securities  in  the  New  York  market,  the  depreciated  exchanges 
were  corrected  by  means  of  sales  of  European  securities,  for  which 
a  market  was  created  both  on  the  New  York  Stock  Exchange  and 
on  the  curb.  These  securities,  which  were  issued  in  foreign  cur- 
rency, fluctuated  in  sympathy  with  the  exchange  rates,  even  though 
the  American  sub-shares  and  certificates  were  sold  in  dollars. 

45a  By  courtesy  of  Walter  S.  Grifford,  vice-president  of  the  American 
Telephone  and  Telegraph  Company. 

**Wall   Street  Journal,  December  25,  1917. 
"Wall  Street  Journal,  January  9,  1918. 


358        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

(a)  Industrial  Stocks — 

The  so-called  international  securities  which  were  traded  in  on 
more  than  one  stock  exchange  in  Europe,  were  sold  in  New  York. 

1.  Royal  Dutch  shares — In  December,  191 6,  Kuhn,  Loeb 
&  Company  purchased  74,000  shares  of  common  stock  of  the  Royal 
Dutch  Company  for  the  Working  of  Petroleum  Wells  in  Nether- 
lands India.  The  par  value  is  lOO  guilders,  which  at  gold  parity 
is  equivalent  to  $40.20.  The  Dutch  shares  were  deposited  with 
the  Equitable  Trust  Company  and  against  them  222,000  American 
certificates  in  dollars  were  issued.  The  block  sold  in  this  country 
represented  about  one-thirtieth  of  the  total  authorized  issue,  which 
at  the  date  of  the  introduction  into  the  New  York  market  amounted 
to  2,000,000  shares.  The  transaction  helped  to  stabilize  sterling 
in  New  York. 

2.  "Shell"  shares — On  July  23,  1919,  Kuhn,  Loeb  &  Com- 
pany bought  750,000  shares  of  a  par  value  of  £1  of  common  stock 
of  the  "Shell"  Transport  &  Trading  Company,  Ltd.,  which  is 
affiliated  with  the  Royal  Dutch  Company.  This  amount  likewise 
represents  about  one-thirtieth  of  the  total  ordinary  stock  outstand- 
ing, amounting  to  20,000,000  shares.  The  shares  were  in  sterling 
and  against  them  375,000  American  certificates  in  dollars  at  the 
rate  of  one  American  share  for  two  British  shares  were  issued  by 
the  Equitable  Trust  Company,  the  depositary  for  the  British 
shares.  In  the  case  of  both  the  "Shell"  and  the  Royal  Dutch  shares 
provision  was  made  for  arbitrage  transactions  between  the  New 
York  and  London  Stock  Exchanges,  and  for  the  conversion  back 
and  forth  of  American  and  British  shares.  The  "Shell"  shares, 
placed  in  New  York  four  months  after  the  "peg"  on  sterling  was 
released,  helped  to  correct  the  depreciated  rate  of  sterling  at  that 
time. 

3.  Rand  shares — In  January,  1920,  150,000  shares  of  ordi- 
nary or  common  stock  of  Rand  Mines,  Ltd.,  the  leading  gold-pro- 
ducing mines  in  the  world,  were  sold  in  New  York  by  a  syndicate 
headed  by  Bernhard,  Scholle  Si.  Company.  As  in  the  above  cases 
the  British  shares  were  deposited  and  American  certificates  issued 
against  them.  The  basis  was  3  American  certificates  for  5  British 
shares.  This  block  also  constituted  a  very  small  fraction,  about  7 
per  cent,  of  the  total  issue,  2,125,995  shares.    The  par  value  was 


PRINCIPLES   AND  PRACTICE   IN  THE   WORLD  WAR  359 

5s.  and  as  in  the  two  previous  cases  dividends  were  payable  at  the 
prevailing  rate  of  exchange. 

An  interesting  feature  of  the  Rand  securities  is  the  fact  that  as 
commodity  prices  rose  the  dividends  of  this  company  declined.  The 
dividend  rates  were  as  follows:  1909 — 350  per  cent;  1910  to  1913 
— 220  per  cent;  1914 — 200  per  cent;  1915 — 160  per  cent;  1916 — 
150  per  cent;  1917 — 145  per  cent;  and  1918 — 85  per  cent.  The 
decline  in  commodity  prices  ought  to  result  in  the  return  of  the 
dividends  toward  the  pre-war  level. 

4.  De  Beers  shares — The  De  Beers  Consolidated  Mines, 
Ltd.,  controls  about  80  per  cent  of  the  output  of  the  world's 
diamonds.  In  January,  1920,  Lazard  Freres  of  New  York  sold 
32,000  deferred  shares  or  common  stock  of  this  company.  The 
par  value  was  £2  lOs.  The  British  shares  were  deposited  with 
the  Central  Union  Trust  Company  and  against  them  American 
shares  were  issued.  The  basis  was  5  American  shares  for  2  of  the 
British.  This  ratio  was  fixed  merely  to  make  the  American  shares  of 
convenient  denominations.  In  the  case  of  De  Beers  also  the  total 
block  sold  in  New  York  was  very  small,  about  3  per  cent  of  the 
1,000,000  shares  outstanding,  and  the  securities  likewise  were 
traded  in  on  the  London  Stock  Exchange  and  the  Paris  Bourse. 

(b)   Internal  Bonds  of  Governments  and  Municipalities'^'^ — 

The  depreciation  of  sterling  in  New  York  resulted  in  the  sale 
there  of  sterling  bonds,  of  many  foreign  states  and  cities  in  all 
parts  of  the  world,  the  market  for  which  had  been  either  London 
alone  or  several  of  European  stock  exchange  centers. 

As  European  exchange  depreciated  in  New  York  speculation  in 
exchange  took  the  form  of  the  purchase  of  the  internal  bonds  of 
European  governments  and  of  their  cities.  At  times  the  purchases 
amounted  to  $1,000,000  or  more  per  day.  The  quotation  list  of 
the  New  York  curb  on  December  31,  1920,  included  Internal 
43^2 's  of  the  French  Republic,  Internal  5's  and  63^ 's  of  the  Russian 
Government,  and  the  mark  bonds  of  the  cities  of  Berlin,  Frank- 
furt, Hamburg,  Magdeburg,  and  Vienna.  The  sales  over  the 
counter  included  a  far  wider  range.  One  brokerage  catalogue 
(Alfred  R.  Risse,  New  York)  contained  over  one  hundred  kinds 

*'*  Proposals  to  list  them  on  the  N.  Y.  Stock  Exchange. 
See  the  Missing  Link  in  International  Finance,  by  Eugene  Meyer,  Jr., 
(1921). 


360        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

of  foreign  internal  securities,  for  instance,  two  internal  loans  of 
Russia,  three  loans  of  Belgium,  five  of  France,  five  of  Italy,  six  of 
Great  Britain,  and  21  of  Germany  were  listed.  Again,  15  issues  of 
7  British  cities  and  over  1 00  issues  of  37  German  cities  as  well  as 
25  issues  of  German  industrial  securities  and  over  25  issues  of  the 
German  land  mortgage  banks  were  traded  in.  The  decline  of  the 
exchanges  stimulated  the  purchase  of  these  securities  in  the  hope 
that  the  currencies  would  eventually  return  to  parity.  However, 
the  extreme  depreciation  of  these  securities  points  to  the  possibility 
of  the  devaluation  of  the  unit  of  currency.  Upon  the  further  de- 
preciation of  the  exchanges,  the  probability  of  their  return  to  gold 
parity  diminished  and  the  purchase  of  securities  issued  in  foreign 
currencies  was  checked.  Another  factor  undoubtedly  was  the  threat 
of  drastic  taxation,  from  which  the  foreign  holders  of  internal 
securities  would  not  be  exempted. 

v.  Loans 
(a)  Short-Term  Bills— 

1.  Under  normal  conditions — Under  normal  conditions  a 
country  which  is  temporarily  importing  and  consuming  more  than 
it  is  exporting  and  producing  may  borrow  money  to  tide  it  over 
the  interval.  It  may  either  renew  its  bills  or  else  borrow  from 
third  parties.  The  function  of  a  high  discount  rate  before  the  war 
was  to  attract  funds  when  a  country's  exchange  rate  depreciated. 
Finance  bills  would  be  raised  between  merchants  in  one  country 
and  bankers  in  another.  These  international  bills  were  much  like 
the  domestic  accommodation  bills.  At  a  time  when  no  commercial 
bills  are  available  bankers  in  one  country  will  draw  upon  bankers 
in  another  and  liquidate  the  debt  by  remitting  commercial  bills  as 
soon  as  exports  increase  and  make  drafts  available.  Importers  are 
thus  able  to  purchase  finance  bills  at  a  time  when  commercial  bills 
are  not  available,  and  exporters  sell  bills  to  the  same  bankers  at 
times  when  importers  do  not  need  drafts.  Such  is  the  normal  prac- 
tice when  there  is  a  temporary  excess  of  exports  or  of  imports. 

2.  Treasury  bills — In  August,  191 7,  the  British  govern- 
ment through  its  fiscal  agents,  J.  P.  Morgan  &  Company,  issued 
treasury  bills  in  New  York  for  the  purpose  of  stabilizing  exchange. 
Between  August,  1917,  and  November  11,  1918,  the  total  amount 
outstanding  reached  a  maximum  of  $84,405,000,   and  from  the 


PRINCIPLES  AND   PRACTICE   IN  THE   WORLD   WAR  361 

date  of  the  armistice  to  March  20,  1919,  when  the  "peg"  was  re- 
leased, the  maximum  was  $91,055,000.  In  one  week  as  much  as 
$20  million  was  sold.  The  rate  originally  was  5  per  cent,  and 
was  subsequently  raised  by  fractions  to  6  per  cent.  The  amounts 
sold  ranged  from  7  to  8  million  dollars  weekly,  and  the  period  was 
60  to  90  days. 

On  July  31,  19 19,  the  French  Treasury  authorized  a  similar 
arrangement.  J.  P.  Morgan  &  Company  sold  60-  and  90-day 
French  treasury  bills  in  weekly  amounts  of  about  $5  million,  and 
not  exceeding  a  total  of  $50  million.  The  rate  w^as  6  per  cent 
originally  and  was  raised  in  March,  1920,  to  65^  per  cent.  In 
neither  of  these  arrangements  did  the  United  States  Treasury  have 
any  direct  interest  or  influence. 

Some  internal  treasury  bills  of  the  European  belligerents  were 
sold  in  New  York  in  19 16. 

In  floating  these  bills  the  foreign  governments  had  no  intention 
of  retiring  them  at  the  maturity  date.  They  intended  to  refund 
them.  For  this  reason  the  Federal  Reserv^e  Board*^  opposed  the 
investment  of  the  funds  of  the  member  banks  in  these  bills.  The 
Board  felt  that  member  banks  should  keep  their  resources  liquid 
and  not  lock  up  their  funds  in  obligations  and  investments  which, 
though  short-term  in  form  or  name,  were  either  by  contract  or 
through  force  of  circumstances  to  be  renewed  until  normal  condi- 
tions should  return.  The  Board  did  not  feel  that  it  was  in  the 
interest  of  the  country  that  the  member  banks  should  invest  in 
foreign  treasury  bills.  However,  it  disclaimed  any  intention  of 
reflecting  upon  the  financial  stability  of  any  nation.  From  the 
point  of  view  of  the  borrower  short-term  treasury  bills  have  a 
serious  disadvantage.  They  mature  continually,  and  cause  diffi- 
culty in  periods  of  credit  stringency.  Furthermore,  as  a  floating 
debt  they  tend  at  maturity  to  depress  the  exchanges,  to  correct 
which  they  were  originally  floated.  The  exchange  market  was  re- 
lieved when  Great  Britain  reduced  the  total  amount  of  her 
treasury  bills  in  New  York  to  $18  million  in  December,  1920. 

3.  Bank  balances — At  the  outbreak  of  the  war  the  United 
States  was  indebted  abroad  on  current  account  to  the  extent  of 
about  $1000  million.  The  demand  by  Great  Britain  that  this  in- 
debtedness  be   liquidated    raised    sterling   exchange   to    $7.00   on 

"Press  statement  November  28,   1916,   and   Federal   Reserve  Bulletin, 
December,  1916. 


362        INTERNATIONAL   IINANCE   AND   ITS    REORGANIZATION 

August  4,  19 1 4.  As  a  result  of  the  large  excess  of  exports  the 
floating  indebtedness  of  the  United  States  was  paid  off  and,  further, 
many  American  banks  opened  credits  in  favor  of  London.  Because 
of  the  existence  of  a  free  gold  market  in  New  York  neutral  funds 
were  transferred  to  the  United  States.  The  large  stock  of  gold  in 
the  United  States  made  likely  the  redemption  of  the  indebtedness 
in  gold.  Because  of  the  stabilization  of  sterling  in  New  York  the 
neutrals  were  induced  to  convert  their  excessive  sterling  and  franc 
bills  into  dollars,  which  could  not  be  withdrawn  during  the  period 
of  the  embargo.  When  the  embargo  was  lifted  and  the  sterling 
"peg"  released,  the  exchange  of  the  European  neutrals  declined  in 
New  York  and  they  could  not  therefore  withdraw  gold.  Their 
bank  balances  in  New  York  then  were  used  to  correct  their  de- 
clining exchanges. 

(b)  Long-Term  Loans — 

I.  Floated  before  the  armistice — An  important  correc- 
tive of  the  depreciated  exchanges  in  New  York  was  the  long-term 
credit  extended  to  the  Allied  Powers.  The  loans  to  Great  Britain 
and  France  have  been  treated  in  detail  in  the  section  on  public 
finance.  Germany  received  no  credit  in  New  York  with  the  ex- 
ception of  one  small  short-term  loan  for  $15  million  underwritten 
by  Chandler  &  Company.  The  total  loans  issued  in  the  United 
States  up  to  December  31,  191 8,  according  to  Prof.  Bullock  and 
associates,  amounted  to  $1751  million  and  the  amount  outstanding 
on  January  I,  19 19,  was  $1689  million.^^ 

Probably  because  he  included  unannounced  issues,  held  by  banks 
and  bankers,  Mr.  Thomas  W.  Lamont,  of  J.  P.  Morgan  &  Com- 
pan}^,  presented  much  larger  totals.  According  to  the  records  of 
his  firm  on  January  i,  1919,  there  were  held  by  American  in- 
vestors and  bankers  $2200  million  of  foreign  government  obliga- 
tions issued  after  the  war  began. 

In  addition  to  the  foregoing  government  issues  in  the  hands  of 
American  bankers  and  investors,  Mr.  Lamont  estimated  that  there 
were  held  $500  million  of  foreign  private  obligations.^** 

** Balance  of  Trade  of  the  United  States,  ibid. 

^Journal  of  Commerce,  January  2,  1919. 

Annual  Report  of  the  Secretary  of  the  Treasury  for  1920.  Exhibit  33, 
pp.  351-4,  Estimate  of  Financial  Obligations  of  Foreign  Governments 
offered  in  the  United  States  from  August  i,  1914,  to  December  31,  1919, 
gives  a  total  of  $4,129.8  million  including  $950  million  of  Canadian  In- 
ternal Loans,  of  which  part  was  taken  in  the  United  States. 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 


363 


Loans  (Other  than  Ciiedits  Established  by  the  Government)  Placed 
IN  the  United  States  from  Aug.  i,  1914,  to  Dec.  31, 1918,  and  Amounts 
Outstanding  on  Dec.  31,  1918,  According  to  Prof.  Bullock 

(in  million  dollars) 


Class 

Orignal  amount 

issued  in 
United  States 

Amount  outstanding 

in  United  States  on 

Dec.  31,  1918 

I.  Government  loans: 

Great  Britain 

700 
450 
175 

8S 

30 

10 

5 
5 
5 
5 
3-5 

652 

France 

450 

Canada 

175 

Russia 

85 

Argentina 

30 

Germany 

2 

Newfoundland     

5 

Norway 

5 

Switzerland 

5 

China 

5 

Panama 

2.9 

Total 

1473-5 

104.6 

86 

6 

1416.9 

2.  Municipal  and  provincial: 

Canada 

103.8 

France 

86 

Brazil  and  Chile 

5.9 

Total 

196.6 

27.1 
15-0 

195 -7 

3.  Railroad  loans: 

23.4 

Argentina 

15.0 

Total 

42.1 

11.2 

26.2 
1-3 

38.4 

4.  Industrial  loans: 

Canada 

10.7 

5.  Public  utility  loans: 

Canada  

26.2 

1.3 

Total 

27-5 
1750-9 

27-5 

1689.2 

Of  the  loans  issued  at  any  previous  time  in  the  United  States 
those  outstanding  on  January  i,  191 9,  amounted  to  about  $2200 
million,  not  including  subscriptions  to  foreign  internal  loans  except 


364        INTERNATIONAL    FINANCE   AND   ITS    REORGANIZATION 

the  French  Government  Internal  5's  due  In  1931  and  the  Russian 
Government  5^'s  due  in  1926. 

Foreign  Government  Oblig.a.tions  Issued  and  Outstanding  Held  by 

Private  Interests  on  Jan.  i,  1919,  According  to  Mr.  Lamont 

(in  million  dollars) 


Country 

Total  issued 

Amount  repaid 

Great  Britain 

1308 

845 

160 

29 

45 

IS 

7 

5 

8 

5 
371 
147 

6 

3 

3 

3 

10 

S 
130 

456 

235 

3S 

25 

20 

France 

Russia 

Italy 

Germany 

Switzerland 

10 

Greece 

Sweden 

Norway 

3 

China 

Canada 

59 
73 

Argentina 

ChUe 

Bolivia 

Panama 

Uruguay 

Yucatan 

Brazil 

310S 

gi6 

Foreign  Loans  in  the  United  States  Outstanding  Jan.  i,  1919  ^^ 
(in  million  dollars) 


Country 

Amount 

Country 

Amount 

Great  Britain 

723-4 
535-5 

462.7 

128.6 

107.8 

85.0 

47-7 
12.9 
10. 0 

Brazil 

S-5 
50 
SO 

4-5 

2-9 

2  0 

France 

Norway 

Canada  and  Newfound- 

Switzerland  

land  

Boli%'ia     

Mexico 

Panama  ....        

Taoan     

Germany       .... 

Russia 

Peru 

1 . 0 

Argentina 

Australia 

1 . 2 

Santo  Domingo 

Chile 

0. 4. 

Cuba 

Denmark 

0  2 

Total 

2163.8 

"  Statement  of  the  Guaranty  Trust  Co. 
Reserve  Bulletin,  January,  1919. 


Also  reprinted  in  the  Federal 


PRINCIPLES   AND  PRACTICE   IN  THE   WORLD   WAR  365 

This  amount  does  not  include  cash  advances  and  other  charges 
against  credits  established  by  the  United  States,  but  does  include 
loans  placed  in  the  American  investment  market  at  any  time  by 
foreign  governments,  states  and  municipalities,  and  private  corpora- 
tions, railroads,  public  utilities  and  industrial  corporations.  A 
similar  table  as  of  July  i,  1920,  gives  a  total  of  $2222  million.^- 

2.  Loans  floated  after  the  armistice — After  the  signing 
of  the  armistice  the  belligerents  of  Europe  floated  huge  loans  in 
the  New  York  market.  After  the  release  of  the  "peg"  in  March, 
19 1 9,  when  the  exchange  rates  of  the  countries  of  Europe  declined 
below  parity  in  the  New  York  market,  the  neutrals  too  called 
upon  the  American  investor  for  funds.  On  December  31,  192O, 
there  were  listed  on  the  New  York  Stock  Exchange  the  bonds  of 
the  United  Kingdom,  the  French  Government,  the  Kingdom  of 
Italy,  Kingdom  of  Belgium,  the  Government  of  Switzerland  and 
five  issues  of  the  Dominion  of  Canada.  In  addition  the  securities 
of  several  European  cities  were  listed — the  bonds  of  Paris, 
Bordeaux,  Lyons,  and  Marseilles,  of  Berne,  Zurich,  Copenhagen, 
Christiania,  and  Tokio.  The  bonds  of  the  kingdoms  of  Denmark 
and  Norway  were  listed  on  the  curb  and  subsequently  transferred 
to  the  Stock  Exchange. 

The  total  loans  floated  in  the  United  States  between  the  date 
of  the  armistice  and  January  i,  1921,  were  $783.3  million. 
Several  of  the  loans  included  in  this  amount  were  renewals  of 
loans  previously  placed.^^ 

3.  Investment  trusts — The  proposal  for  an  investment 
trust  was  put  forth  a  month  after  the  armistice  was  signed.^'* 

The  idea  was  well  received  in  commercial  and  financial  circles, 
and  subsequently  many  tentative  proposals  were  made. 

(a)  European  investment  trusts — The  investment  trust  is  an 
established  financial  institution  in  Europe.    The  rate  of  interest  on 

"Also  reprinted  in  Federal  Reserve  Bulletin,  Jul}',  1920. 

"Journal  of  Commerce,  January  3,  1921.  This  paper  printed  the 
totals  as  well  as  the  individual  issues  on  the  first  day  of  the  month 
during  1920  and  part  of  1919. 

"Address  of  Paul  M.  Warburg  at  the  Emergency  and  Reconstruction 
Congress  of  the  War  Service  Committees  of  American  Industries,  De- 
cember, 1918,  at  Atlantic  City.  Subsequently  printed  in  the  Annals  of 
the  Academy  of  Political  and  Social  Science  and  in  The  Nation's  Business 
during  1919. 


366       INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 

the  bonds  of  the  home  governments  was  less  than  the  rate  on  foreign 
obligations.  The  accumulation  of  savings  in  Europe  sought  profit- 
able investments  and  as  a  result  investment  trusts  Vi^ere  developed. 
These  trusts  originated  in  Scotland  in  i860,  and  grew  in  number 
thereafter.  The  underlying  principle  is  the  diversification  of  risk, 
which  is  made  possible  by  pooling  many  small  funds  of  savings. 
Under  the  guardianship  of  experienced  financiers  these  are  invested 
in  ventures  abroad.  The  British  Investment  Trust,  Ltd.,  the 
Metropolitan  Trust,  Ltd.,  the  Second  Edinburgh  Investment  Trust, 
Ltd.,  and  the  Investment  Trust  Corporation,  Ltd.,  owned  from 
200  to  315  separate  issues,  including  bonds  of  foreign  governments, 
municipalities  and  the  securities  of  railroads,  public  utilities  and 
banking,  manufacturing  and  trading  corporations.  The  diversifica- 
tion of  investments  affords  stability.  The  British  investment  trusts 
have  specialized  in  particular  enterprises  such  as  rubber  and  tea 
plantations  or  mining.  These  institutions  built  up  British  interests 
abroad  and  aided  in  the  development  of  foreign  countries,  such  as 
the  United  States,  Argentina,  Canada  and  Australia.  The  con- 
tinental trusts  specialize  in  their  investments.  Typical  of  this 
specialization  are  the  Trust  for  Electrical  Enterprises  in  Berlin, 
the  Trust  for  Rubber  Securities  in  Antwerp,  and  the  Trust  for 
Metal  Securities  in  Basle.  These  trusts  buy  both  stable  investment 
securities  and  speculative  securities.  Again,  at  times  they  buy  for 
the  purpose  of  securing  control.  Before  the  war  the  yield  was 
fairly  high,  8  or  10  per  cent,  and  the  expense  of  operation  was 
from  0.2  to  0.5  per  cent  of  the  investment.  A  list  of  the  European 
trusts  may  be  found  in  the  year  books  of  the  various  stock  ex- 
changes, such  as  the  Stock  Exchange  Year  Book  of  London,  Saal- 
ing's  Boersenhandbuch  of  Berlin,  Van  Oss'  Effectenhandboek  of 
Amsterdam,  the  Annuaire  Desfosses  of  Paris,  and  the  Recueil 
Financier  of  Brussels.^^ 

(b)  American  investment  trusts — Among  the  financial  institu- 
tions of  the  United  States  the  analogue  of  the  investment  trust  is 
the  holding  company.  Many  of  the  public  utility  corporations  in 
reality  are  investment  trusts  specializing  in  public  utilities. 

The  American  International  Corporation,  formed  in  19 16,  is 
pomewhat  similar  to  the  investment  trusts  of  Europe.  According 
to  its  official  statement  the  business  transacted  by  it  includes  par- 

*°  For  further  discussion  see  Federal  Reserve  Bulletin,  November,  1920, 
for  article  by  T.  H.  Thiesing  of  the  Inter-American  High  Commission, 


PRINCIPLES   AND   PRACTICE    IN   THE   WORLD   WAR  367 

ticlpation  In  foreign  corporations  or  in  domestic  corporations  doing 
a  foreign  business.  Such  participation  is  achieved  through  the  in- 
vestment in  corporate  securities.  Some  securities  are  held  for  in- 
come, others  are  sold  from  time  to  time.  The  American  Inter- 
national Corporation  operates  much  like  a  holding  company,  which 
buys  part  or  all  of  the  securities  of  another  company  for  purposes 
of  control. 

Another  American  institution  similar  to  the  investment  trust 
is  the  Foreign  Bond  and  Share  Corporation,  which  was  formed  in 
May,  1919.  Its  purpose,  as  stated  in  its  prospectus,  is  to  finance 
public  and  private  enterprises  in  Central  and  South  America,  the 
Far  East,  Europe,  and  other  parts  of  the  world  and  to  sell  the 
debentures  of  the  corporation  based  upon  them.  Its  directorate 
consists  of  representatives  of  prominent  financial  institutions,  in 
several  parts  of  the  country. 

4.  The  War  Finance  Corporation — ^The  investment  trusts 
in  the  United  States  and  the  Edge  law  corporations,  to  be  dis- 
cussed below,  were  not  formed  for  the  purpose  of  correcting 
foreign  exchange  rates.  Their  prime  purpose,  to  mobilize  the 
investment  funds  of  the  United  States  and  to  extend  credit  to 
foreign  countries,  would  have  the  effect  of  correcting  exchange 
rates.  For  borrowing  by  a  country  creates  credits  in  its  favor 
just  as  exports  would,  and  lending  by  a  country  creates  debits 
just  as  imports  would. 

The  need  for  materials  by  the  countries  of  Europe,  whose 
currencies  were  depreciated,  was  met  temporarily  and  in  small 
part  by  the  War  Finance  Corporation.  This  institution  was 
organized  in  the  Treasury  Department  with  a  capital  of  $500 
million,  all  owned  and  paid  for  by  the  United  States  Treasury. 
Its  power  to  aid  exports  was  granted  under  the  Victory  Note  Act 
passed  on  March  3,  1919.  It  was  not  very  active  because  during 
the  period  of  its  functioning,  the  United  States  government  itself 
made  advances  to  the  countries  of  Europe  partly  out  of  the  original 
$10,000  million  fund,  gave  credits  authorized  by  the  Victory 
Note  Act  for  the  sale  of  surplus  army  supplies  left  in  Europe, 
extended  credits  for  the  sale  of  wheat,  the  price  of  which  was 
guaranteed,  and  advanced  monies  for  relief.  As  these  credits 
expired,  applications  for  loans  were  received  by  the  War  Finance 
Corporation.     Up  to   May   10,   1920,  when,  under  orders  from 


368        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  Secretary  of  the  Treasury,  it  ceased  making  loans,  the  com- 
mitments entered  into  amounted  to  about  $50  million,  of  which 
about  $30  million  was  advanced  in  cash.  About  $100  million  of 
applications  were  pending  at  the  time  of  the  suspension  of  activity. 
In  theory  the  War  Finance  Corporation  operated  like  the  European 
investment  trusts.  It  took  the  obligations  of  the  American  exporter 
backed  by  the  paper  of  the  European  importer,  endorsed  by  his 
bank  and  guaranteed  by  his  government.  On  the  other  hand  the 
corporation  expected  to  obtain  additional  funds  through  the  sale 
of  its  own  debentures,  the  first  series  of  which  amounting  to 
$200  million,  were  issued  in  1919  (though  not  under  the  amend- 
ment authorizing  the  promotion  of  exports). 

5.  Edge  law  corporations — The  War  Finance  Corporation 
was  considered  as  an  expedient  for  the  transition  period  only.  The 
law  provided  for  the  cessation  of  its  activity  one  year  after  the 
proclamation  of  peace.  However,  the  function  of  the  War  Finance 
Corporation  was  to  be  exercised  in  the  post-war  period  by  private 
initiative,  under  S.2742,  the  so-called  Edge  Law,  which  authorized 
banking  corporations  to  do  a  foreign  banking  business. 

a.  The  law — The  Edge  Law,  approved  December  24,  19 19, 
is  an  amendment  to  the  Federal  Reserve  Act.  It  authorized  cor- 
porations to  be  organized  for  the  purpose  of  engaging  in  inter- 
national financial  operations,  either  directly  in  a  dependency  or 
msular  possession  of  the  United  States  or  through  the  agency  or 
control  of  local  institutions  in  foreign  countries.  Such  corporations 
are  put  under  the  control  of  the  Federal  Reserve  Board.  In 
addition  to  a  wide  variety  of  banking  powers  such  as  the  power 
to  purchase,  sell,  discount  and  negotiate  with  or  without  endorse- 
ment, notes,  drafts,  checks,  bills  of  exchange,  acceptances  and 
evidences  of  indebtedness,  and  to  purchase  and  sell  securities, 
Edge-law  corporations  may  issue  debentures,  bonds  and  promissory 
notes,  but  not  exceeding  10  times  their  capital  stock  and  surplus. 
Furthermore,  such  corporations  have  the  power,  with  the  consent 
of  the  Federal  Reserve  Board,  to  purchase  and  hold  stock  or  other 
certificates  of  ownership  in  any  other  corporation  not  transacting 
any  business  in  the  United  States,  except  such  as  may  be  incidental 
to  its  international  foreign  business. 

b.  Companies  formed — The  First  Federal  Foreign  Banking 
Corporation,  of  New  York,  was  organized  under  the  Edge  Law, 


PRINCIPLES   AND  PRACTICE  IN  THE  WORLD  WAR  369 

shortly  after  its  passage.    The  sharp  decline  in  the  exchanges  in 

1 919  and  in  1920  delayed  the  formation  of  other  similar  corpora- 
tions. Furthermore  the  suspension  of  the  War  Finance  Corpora- 
tion in  the  spring  of  1920  caused  the  abandonment  of  plans  for  the 
organization  of  similar  additional  companies,  for  these  expected  to 
obtain  loans  from  the  War  Finance  Corporation  if  conditions  in  the 
investment  market  should  make  it  difficult  for  them  to  obtain  funds 
from  the  public.     The  sharp  decline  in  prices  toward  the  end  of 

1920  created  a  strong  demand  throughout  the  country  that  the 
bankers  give  some  relief.  In  response  to  this  pressure  the  American 
Bankers'  Association  projected  the  Foreign  Trade  Financing  Cor- 
poration with  a  capital  of  $100  million.  The  cotton  planters, 
who  were  very  severely  affected  by  the  decline  in  prices,  likewise 
organized  on  December  29,  1920,  the  Federal  International  Bank- 
ing Corporation  with  a  capital  of  $7  million.  The  former  com- 
pany never  was  organized.  The  latter  was  not  called  to  active 
functioning  owing  to  the  sharp  rise  in  cotton  prices  in  the  fall 
of  1921. 

The  deranged  condition  of  the  exchanges  prevented  further 
large  exports  from  the  United  States,  The  damming  back  of  the 
flow  of  goods  accelerated  the  world-wide  drop  in  prices.  The 
immediate  purpose  of  financial  institutions  along  the  lines  of  the 
European  Investment  trust  or  the  Edge  Law  corporations  was  to 
advance  credit  to  Europe,  to  correct  the  declining  exchanges,  and 
to  sustain  the  normal  currents  of  trade. 

vi.   The  Control  of  the  Movement  of  Capital 

(a)  Control  of  the  Movement  of  Capital  in  the  United  States — 
During  the  war  legislation  was  enacted  whose  prime  purpose 
was  to  check  the  financial  operations  of  enemy  aliens.  Subdivision 
b,  section  V,  of  the  "Trading  with  the  Enemy  Act"  as  amended 
gave  the  President  power  to  investigate,  regulate,  and  prohibit  by 
means  of  licenses  or  otherv/ise  any  transactions  in  foreign  exchange 
and  the  exportation,  hoarding,  melting  or  earmarking  of  gold,  silver, 
coin,  or  bullion  or  currency,  transfers  of  credit  of  any  form  (other 
than  credits  relating  to  transactions  wholly  within  the  United 
States),  and  transfers  of  evidences  of  indebtedness  or  of  the  owner- 
ship of  property  between  the  United  States  and  any  foreign 
countries,  whether  enemy  or  ally  of  enemy,  or  between  residents 


370       INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 

of  one  or  more  foreign  countries  by  any  person  within  the  United 
States. 

To  give  effect  to  this  legislation  the  Division  of  Foreign 
Exchange  of  the  Federal  Reserve  Board  classified  dealers  in  foreign 
securities  into  three  groups.  Those  in  Class  C  were  dealers  who 
carried  accounts  or  securities  or  who  dealt  in  securities  for  foreign 
correspondents,  but  who  did  not  carry  accounts  or  securities  with 
foreign  correspondents,  or  deal  through  foreign  correspondents. 
In  other  words  Class  C  consisted  of  dealers  who  operated  in  the 
United  States.  Class  B  were  dealers  who  carried  accounts  or 
securities  with  foreign  correspondents  or  who  dealt  through  such 
correspondents,  but  did  not  carry  accounts  or  deal  in  securities 
for  foreign  correspondents.  In  other  words,  Class  B  were  dealers 
in  the  United  States  who  operated  abroad.  Class  A  consisted  of 
dealers  who  dealt  in  securities  for  foreign  correspondents  or  through 
foreign  correspondents,  and  who  carried  accounts  or  securities  with 
or  for  them.  In  other  words,  Class  A  consisted  of  dealers  who 
operated  in  the  United  States  for  foreign  account  and  who  operated 
abroad  through  correspondents.  Dealers  were  licensed  and  the 
Division  of  Foreign  Exchange  of  the  Federal  Reserve  Board  always 
retained  the  right  to  restrict  the  operations  of  any  licensee,  with 
the  object  of  preventing  Germany  from  realizing  on  property  or 
credit  in  neutral  countries  for  the  purpose  of  establishing  credit 
or  for  the  purchase  of  war  materials.^^ 

(b)  Control  of  the  Movement  of  Capital  by  Foreign  Countries — 
Other  countries  likewise  regulated  operations  in  foreign 
exchange,  not  only  for  the  purpose  of  preventing  the  enemy  from 
realizing  on  property  held  abroad,  but  also  for  the  purpose  of 
stabilizing  exchange.  Most  of  the  belligerents  forbade  the  expor- 
tation of  currency  or  securities,  the  countries  including  Great 
Britain,  France,  Belgium,  Roumania,  Greece,  Portugal,  and  Brazil. 
A  good  many  countries  prohibited  speculation  in  exchange  and 
restricted  purchases  and  sales  of  foreign  drafts  to  bona  fide  trade 
operations.  Among  such  countries  were  Italy,  Belgium,  Greece, 
Czecho-Slovakia  and  Jugoslavia.  Czecho-Slovakia  went  so  far  as 
to   require  the  payments  for  its  exports  to  be  made  in  foreign 

**  Executive  Order  of  the  President,  dated  Jan.  26,  1918,  and  Instruc- 
tions to  Dealers,  issued  by  the  Federal  Reserve  Board,  Division  of 
Foreign  Exchange. 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR  37 1 

currency.  The  licensing  and  control  of  dealers  operating  in  foreign 
exchange  was  practised  by  Germany,  Italy,  Belgium,  Roumania, 
Greece,  Portugal  and  Czecho-Slovakia.  Several  countries  cen- 
tralized all  dealings  in  foreign  exchange  in  order  to  secure  better 
control,  among  them  being  Germany,  Austria,  Bulgaria,  France, 
Italy,  Roumania,  Greece,  Czecho-Slovakia,  Jugoslavia,  Finland, 
and  Spain. 


F.  Stabilization  of  the  Allied  Exchanges  in  New  York 

i.  Mechanism    of  the   "Peg" 

The  United  States  government  was  not  officially  concerned  In 
the  mechanism  of  the  stabilization  of  the  Allied  exchanges  in 
New  York.  Government  advances  to  the  Allies  were  made  for 
the  purpose  of  supplying  them  with  war  materials.  Of  course 
these  advances  helped  Great  Britain  in  continuing  to  "peg"  the 
exchanges.  The  "pegging"  operation  was  undertaken  by  Great 
Britain  as  soon  as  sterling  began  to  depreciate,  and  it  was  con- 
tinued until  April,  1919.  The  United  States  government  advances 
began  on  April  24,  191 7,  and  continued  until  March  10,  1920. 

(a)    United  States  Government  Advances  to  the  Allies — 

I.  The  law" — By  the  Acts  of  Congress  of  April  24,  1917, 
and  September  24,  191 7,  known  as  the  First  and  Second  Liberty 
Bond  Acts,  and  by  the  amendments  thereto,  the  Secretary  of  the 
Treasury,  with  the  approval  of  the  President,  was  authorized  to 
establish  credits  in  favor  of  the  Allies,  and  to  the  extent  of  the 
credits  to  purchase  at  par  from  the  Allies  their  several  obligations. 
The  Secretary  was  guioed  by  the  necessities  of  the  Allies  for  sup- 
plies and  materials.  According  to  the  law  the  authority  granted 
to  the  Secretary  to  establish  credits  to  foreign  governments  was 
to  cease  upon  the  termination  of  the  war,  but  the  Secretary  fixed 
March  10,  1920,  as  the  date  of  cessation. 

*'  Sections  z  and  3  of  the  Second  Libetty  Bond  Act. 


372        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

2.  The  AMOUNTS — The  total  amount  authorized  was  $10,000 
million,  as  follows:^® 

Million  dollars 

First     Liberty  Bond  Act,  April  24,  191 7 3,000 

Second  Liberty  Bond  Act,  Sept.  24,  191 7 4,000 

Third    Liberty  Bond  Act,  April    4,1918 1,500 

Fourth  Liberty  Bond  Act,  July     9,  1918 1,500 

Total 10,000 

On  March  10,  1920,  the  Secretary  discontinued  the  establish- 
ing of  any  new  credits  in  favor  of  the  Allies  and  limited  the  cash 
advances  under  established  credits  to  the  actual  needs  in  connec- 
tion with  contracts  for  war  materials.  From  April  24,  191 7,  up 
to  November  15,  1920,  the  credits  established,  after  deducting 
credits  which  had  been  withdrawn,  amounted  to  $9711  million, 
distributed  as  follows: 


Countries 

Net  credits 
established  in 
million  dollars 

Great  Britain 

4277 
3048 
1666 

France 

Italy 

Belgium 

349 
188 

Russia 

Czecho-Slovakia 

68 

Greece 

48 
26 

Servia 

Roumania 

25 
10 

Cuba 

Liberia ^ 

S 

Total 

9711 

The  amounts  established  corresponded  roughly  with  the 
amounts  of  exports  from  the  United  States  to  the  several  countries. 
In  the  case  of  France  and  Italy  the  advances  from  the  United 
States  Treasury  at  one  time  exceeded  the  amounts  of  exports. 
From  April  24,  191 7,  to  June  30,  1919,  the  total  cash  advances 
to  the  Allies  amounted  to  $9092  million,  and  the  total  exports 

^  See  the  several  Liberty  Bond  Acts,  also  Report  of  the  Secretary  of 
the  Treasury,  1920,  p.  53, 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 


373 


from  the  United  States  to  the  countries  involved  amounted  to 
$8624  million. 


Country 


Advances  from 

United  States 

treasury 

(in  million  dollars) 


Exports  from 

the 

United  States 

(in  million  dollars) 


United  Kingdom 

France 

Italy 

Belgium 

Russia 

All  others 

Total 


9092 


8624 


3.  The  form  of  the  debt — In  settlement  of  these  advances 
the  Allied  governments  gave  their  obligations,  which  were  short- 
term  or  demand  certificates  of  indebtedness  signed  by  duly  author- 
ized representatives  of  the  several  governments  receiving  the 
advances.  These  obligations  were  to  be  converted  at  par  with 
an  adjustment  for  accrued  interest  into  an  equal  par  amount  of 
gold  bonds  of  the  governments  concerned. 

4.  The  rate  of  interest — The  lav/  originally  placed  the 
interest  on  the  foreign  obligations  at  3  per  cent  per  annum  and 
increased  it  thereafter  to  3^  per  cent,  to  3^  per  cent,  to  4% 
per  cent,  and  finally  to  5  per  cent  to  conform  to  the  rising  cost 
of  funds  to  the  United  States  government.  Above  a  minimum 
the  rate  of  interest  chargeable  to  the  foreign  governments  was  not 
fixed  under  the  terms  of  the  act  but  was  left  to  the  discretion  of 
the  Secretary.  Accordingly  the  Secretary  charged  the  foreign 
governments  ^  per  cent  more  than  the  rate  paid  by  the  United 
States  government  to  compensate  in  part  for  the  loss  to  the  United 
States  arising  from  the  issue  of  tax-exempt  bonds  and  for  the  cost 
of  floating.  The  rate  of  interest  borne  by  any  obligation  in  pay- 
ment of  advances  made  by  the  United  States  government  was  not 
to  be  less  than  the  highest  rate  borne  by  any  bonds  of  the  United 
States.  The  rate  of  interest  of  the  long-term  bonds  into  which 
the  short-term  obligations  of  the  foreign  governments  might  be 
converted  was  to  be  not  less  than  the  rate  of  the  short-term  obliga- 
tions.   The  interest  due  up  to  May  15,  1919,  except  in  the  case 


374        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

of  Russia,  was  paid  in  cash.  To  the  extent  that  such  interest  was 
not  paid  from  other  resources  of  the  governments  concerned,  it 
was  paid  from  the  proceeds  of  further  loans  made  by  the  United 
States.  The  interest  accrued  and  unpaid  for  the  three  semi- 
annual periods  ending  October  15,  1920,  and  November  15,  1920, 
amounted  to  $693  million,  distributed  as  follows: 


Interest  Accrued 
(in  million 

AND  Unpaid  s' 
dollars) 

Country 

Amount 

Great  Britain 

314-6 
211. 5 
120. 2 

France 

Italy 

Belgium 

25-3 

14. 1 

4.0 

2.0 

Russia         

Czecho-Slovakia 

Servia 

Roumania 

1.6 

Total 

693 -3 

5.  Maturity  of  the  principal — The  maturity  of  the  obliga- 
tions of  the  foreign  governments  was  fixed  under  Section  8  of  the 
Victory  Note  Act.  The  obligations  of  foreign  governments 
acquired  by  the  Secretary  of  the  Treasury  were  to  mature  at  such 
dates  as  might  be  determined  by  the  Secretary  provided  that  such 
obligations  acquired  under  the  provisions  of  the  First  Liberty 
Bond  Act  or  upon  the  conversion  of  short-time  obligations  acquired 
thereunder  Avere  to  mature  not  later  than  June  15,  1947,  and 
all  other  such  obligations  of  foreign  governments  were  to  mature 
not  later  than  October  15,  1938.  The  early  certificates  or  obliga- 
tions of  the  foreign  governments  were  payable  at  fixed  dates  of 
maturity,  all  of  which  had  passed,  so  that  they  were  regarded  as 
demand  obligations. 

However,  the  Secretary  was  authorized  to  receive  payments 
on  or  before  maturity  of  any  obligations  of  foreign  governments 
acquired  by  the  United  States  and  to  sell  any  such  obligations  at 
not  less  than  purchase  price  plus  accrued  interest,  and  to  apply 
the  proceeds  to  the  redemption  or  purchase  of  any  bonds  of  the 

"Report  of  the  Secretary  of  the  Treasury,  1920,  pp.  57-58. 


PRINCIPLES   AND   PRACTICE    IN    THE   WORLD   WAR  375 

United  States.     Up  to  November  15,   1920,  about  $115  million 
was  repaid,  distributed  as  follows  :^° 

Million  dollars 

Great  Britain 80 . 2 

France 31.4 

Roumania 1.8 

Servia 0.6 

Cuba o.  s 

Total 114.  S 

(b)    The  Expenditures  of  the  United  States  Army  Abroad — 

The  purchases  of  European  supplies  by  the  United  States  for 
the  army  abroad  helped  indirectly  in  stabilizing  the  Allied 
exchanges.  The  currencies  needed  by  the  United  States  in  France, 
Great  Britain,  and  Italy  for  war  expenditures  in  those  countries 
were  provided  by  the  foreign  governments.  Under  Section  4  of  the 
Second  Liberty  Bond  Act  as  amended,  the  Secretary  of  the  Treasury 
was  authorized  to  make  arrangements  during  the  war  and  for 
two  years  after  its  termination  in  or  with  foreign  governments 
to  stabilize  the  foreign  exchanges  and  to  obtain  foreign  currencies 
and  credits  in  such  countries.  He  was  empowered  to  use  any 
such  credits  or  currencies  for  the  purpose  of  stabilizing  or  rectify- 
ing the  foreign  exchanges.  Equivalent  amounts  of  dollars  w^ere 
made  available  to  these  foreign  governments  to  meet  their  war 
expenditures  in  the  United  States.  The  total  expenditures  from 
January,  191 8,  up  to  November,  1920,  when  the  account  was 
practically  closed,  amounted  to  $1491  million,  distributed  as 
follows : 

Dollar  Equivalents  Paid  by  the  United  States  for  Foreign  Currencies 

Million  dollars 

Belgium 1.2 

France 1025 . 4 

Great  Britain 449 . 5 

Italy 14.4 

Total 1490. 5 

By   this   arrangement  the   needs  of  the   foreign   governments  for 
advances  from  the  United  States  were  reduced."^ 

•"Report  of  the  Secretary  of  the  Treasury,  1920,  p.  53. 
"Reports  of  the  Secretary  of  the  Treasury  for  1918,  p.  36;   1919,  pp. 
66-67;  1920,  p.  67. 


376    .  INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 

(c)  Credits  for  the  Purchase  of  Army  Property  and  of  Guaranteed 
Wheat — 
Additional  credits  were  authorized  under  the  Victory  Note 
Act  (Section  7)  whereby  until  18  months  after  the  termination 
of  the  war  the  Secretary  of  the  Treasury  was  empowered  to 
establish  credits  for  any  of  the  Allied  governments  for  the  pur- 
pose of  providing  for  the  purchase  of  property  owned  but  not  needed 
by  the  United  States  and  of  any  wheat  the  price  of  which  had 
been  guaranteed  by  the  United  States.  The  foreign  government 
was  to  give  in  payment  its  obligation  bearing  interest  at  the  rate 
of  5  per  cent  per  annum  and  maturing  not  later  than  October 
I5i  1938.  The  foreign  obligations  received  through  the  Secretary 
of  War  up  to  November  15,  1920,  on  account  of  the  sales  of 
surplus  war  supplies  aggregated  $563  million,  distributed  as 
follows : 

Million  dollars 

France 400 .  o 

Poland 57-6 

Belgium 27.6 

Jugoslavia 25 .  o 

Czecho-Slovakia 20 . 6 

Roumania 12.9 

Esthonia 12.2 

Lithuania 4.2 

Lat\'ia 2.5 

Russia 0.4 

Total 563.0 

Foreign  obligations  received  through  the  American  Relief 
Administration  on  account  of  relief  rendered  under  the  Act 
approved  February  25,  1919,  and  held  by  the  Treasury  as  cus- 
todian amounted  to  $84  million,  distributed  as  follows : 

Million  dollars 


Poland 51 

Finland 8 

Roumania 8 

Czecho-Slovakia 6 

Russia 4 

Latvia 2 

Esthonia i 

Lithuania o 


8 
Total 84.0 


PRINCIPLES  AND  PRACTICE   IN  THE  WORLD  WAR  377 

(d)  British    Treasury  Bills — 

The  actual  stabilization  of  exchange  was  accomplished  through 
the  purchase  and  sale  of  British  treasury  bills  in  the  open  market 
in  New  York.  The  details  concerning  British  and  French  treasury 
bills  have  been  given  above.  The  amount  of  sterling  exchange 
purchased  for  the  account  of  Great  Britain  by  J.  P.  Morgan  & 
Company,  her  fiscal  agents,  in  the  period  from  the  spring  of  1915 
until  the  spring  of  1919  was  almost  £840  million.  The  Bank  of 
France  bought  f  r.  1 8,000  million  of  French  exchange.  This  sum  was 
provided  partly  from  the  resources  of  the  Bank  and  partly  from 
credits  opened  in  London  and  New  York  in  favor  of  the  Bank 
and  of  the  French  Treasury. 

(e)  Licensing  of  Dealers  in  Exchange — 

The  licensing  of  dealers  in  foreign  exchange  during  the  bel- 
ligerency of  the  United  States  made  it  possible  to  centralize  and 
control  the  foreign  exchange  operations  of  all  dealers  in  the  United 
States.  The  total  amount  bought  and  sold  was  recorded  and  the 
reason  for  any  particular  transaction  was  a  proper  subject  for 
inquiry  and  restriction  by  the  Division  of  Foreign  Exchange  of 
the  Federal  Reserve  Board.  The  control  of  exports  and  imports 
by  the  War  Trade  Board,  the  embargo  on  gold  and  the  control 
of  the  foreign  exchange  operations  by  the  Federal  Reserve  Board, 
all  facilitated  the  "pegging"  of  the  Allied  exchanges  in  New 
York. 

ii.  The  Effects  of  the  "Beg" 

The  stabilization  of  the  Allied  exchanges  interfered  with  the 
self-corrective  effects  of  changes  in  the  visible  and  invisible  trade 
balance.  The  anomalous  effects  were  noticeable  not  only  on  the 
stabilized  currencies,  sterling,  francs  and  lire,  but  on  the  dollar 
and  also  on  the  neutral  currencies.  The  stabilization  of  sterling 
in  New  York  distorted  exchange  rates  throughout  the  world. 

(a)    The  Effect  on  the  Allied  Bowers — 

I.  The  maintenance  of  an  artificL'\l  level — In  spite  of 
a  huge  excess  of  imports  the  Allied  exchanges  remained  fairly 
close  to  par.     The  excess  of  imports  increased   in   unparalleled 


378       INTEBNATIONAL   FINANCE    AND   ITS    REORGANIZATION 

fashion ;  in  the  case  of  the  United  Kingdom,  from  the  equivalent 
of  about  $1157  million  in  1913  to  about  $2917  million  in  191 7; 
in  the  case  of  France,  from  the  equivalent  of  about  $300  million 
in  1913  to  $3000  million  in  191 7;  and  in  the  case  of  Italy,  from 
about  $219  million  in  1919  to  about  $2000  million  in  1917.*'^ 
And  yet  during  the  period  of  the  "peg"  sterling  fluctuated  in  the 
New  York  market  about  2  per  cent  below  par  and  francs  from 
5  to  12  per  cent.  In  furtherance  of  the  common  military  aim, 
it  was  necessary  to  preserve  the  credit  of  the  Allied  governments 
and  to  maintain  their  purchasing  power  in  foreign  markets.  The 
support  of  the  Allied  exchanges  tied  them  to  the  dollar.  The 
fluctuations  in  the  Allied  exchanges  resulted  not  from  the  factors 
both  visible  and  invisible  that  determined  the  balance  of  trade  of 
the  individual  countries  but  from  the  total  Allied  exports,  imports, 
ocean  freights,  interest  charges  and  other  factors  in  the  combined 
trade  balance  of  all  the  Allies, 

2.  The  failure  of  the  self-correctives — The  maintenance 
of  the  Allied  rates  at  an  artificially  high  level  prevented  their  self- 
correction.  Because  the  rates  did  not  fall  to  their  natural  level 
the  imports  of  the  Allies  were  not  checked  nor  were  the  exports 
stimulated.  The  Allied  powers  gav'e  us  fewer  pounds  sterling, 
francs  or  lire  for  American  exports  than  they  would  have  if  the 
exchanges  had  fallen  to  their  natural  level.  Likewise  the  Allies 
received  more  dollars  for  their  exports  to  the  United  States.  Of 
course  commercial  considerations  were  set  at  naught,  because  mili- 
tary considerations  were  primary. 

3.  Financial  weakness  concealed — The  healthy  effect  of 
depreciation  in  reducing  imports  and  in  stimulating  exports  was  not 
felt  during  the  period  of  stabilization.  But  the  prolongation  of 
support  by  the  strong  countries  concealed  the  unsoundness  of  the 
stabilized  currencies.  Therefore  when  the  expedients  for  stabiliza- 
tion were  abandoned,  the  shock  was  severe  in  both  France  and 
Italy.  Had  the  "peg"  been  further  continued  the  disarrangement 
would  have  been  more  painful.  The  stabilization  of  the  exchanges 
created  a  fool's  paradise  for  some  of  the  nations  of  Europe.  The 
release  of  the  exchanges  was  an  admonition  to  adjust  themselves 
to  realities. 


*^  See  the  writer's  International  Commerce  and  Reconstruction,  p.  62. 


PRINCIPLES   AND   PRACTICE   IN   THE    WORLD   WAR  379 

4.  Strengthening  of  British  prestige^^ — The  records  of 
the  Division  of  Foreign  Exchange  of  the  Federal  Reserve  Board 
show  the  focal  position  of  Great  Britain  in  the  international  finan- 
cial system.  From  February  20,  1918,  to  June  25,  1919,  the 
period  in  which  the  foreign  exchanges  were  under  control  in  the 
United  States,  the  total  exchanges  from  all  sources  on  all  countries 
of  the  world  purchased  by  American  dealers  was  $11,770  million, 
while  the  total  amount  sold  was  $11,747  million.  About  55  per 
cent  represented  dealings  in  sterling. 

a.  Sales  of  sterling  between  United  States  dealers — Of  the 
$9980  million  total  purchases  and  sales  of  exchange  between 
dealers  in  the  United  States  during  this  period  approximately  69 
per  cent  was  for  exchange  on  Great  Britain.  During  the  period 
from  February  20,  1918  to  December  31,  1918,  the  corresponding 
figure  was  72  per  cent. 

b.  Sales  of  sterling  by  foreign  holders — Sterling  bills  were 
sold  in  the  United  States  by  foreign  holders  from  February  20, 

1918,  to  June  25,  1919,  to  the  extent  of  $928  million.  Purchase 
of  sterling  by  foreigners  from  American  dealers  amounted  to  $905 
million.  An  excess  of  sterling  bills  of  $23  million  was  offered  on 
the  Nev/  York  market.  The  British  banks  operated  as  inter- 
mediaries for  foreign  accounts.  Purchases  by  American  dealers 
of  sterling  exchange  from  the  neutral  countries  were  greatly  in 
excess  of  the  sales  of  sterling  exchange  to  them.  For  instance, 
during  nine  months  of  19 18  Spain  sold  to  the  United  States 
$12,143,000  of  sterling  exchange  and  purchased  $8,531,000  in 
sterling,  a  balance  in  Spain's  favor  of  $3,612,000.  The  excess 
explains  not  only  the  slight  depreciation  of  the  Allied  exchanges 
in  New  York  but  the  heavy  depreciation  of  the  dollar  and  the 
currencies  of  the  Allies  on  the  neutral  markets. 

During  the  period  of  the  gold  embargo,  which  coincided  largely 
with  the  period  of  control  of  the  exchanges,  sales  of  sterling  in  the 
United  States  covered  current  trade  rather  than  accumulated 
balances.  But  prior  to  the  enforcement  of  the  embargo,  sterling 
exchange  was  sold  in  New  York  for  foreign  account  to  a  much 
larger  extent. 

c.  British  operations  in  neutral  currencies — ^The  important 
position  of  Great  Britain  in  foreign  exchange  is  borne  out  by  the 

"Annual    Report   of    the    Federal    Reserve    Board,    1918,    p.    53,    and 

1919.  P-  47- 


380        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

large  transactions  in  neutral  currencies  which  were  cleared  through 
Great  Britain  en  route  to  and  from  the  United  States.  The 
United  States  bought  $34,622,000  of  neutral  currencies  from  Great 
Britain  but  sold  only  $9,322,000  to  Great  Britain,  leaving  an  excess 
of  purchases  of  neutral  currencies  from  Great  Britain  by  the  United 
States  of  $25,300,000  for  the  period  February  20,  1918  to  Decem- 
ber 31,  1918. 

Transactions  in  Neutral  Cukrencies  Between  Geeat  Britain  and  the 

United  States 

(in  thousand  dollars) 


Currency 

Purchases  by 
United  States 

from 
Great  Britain 

Sales  by 
United  States 

to 
Great  Britain 

Excess  of 
Purchases 

by 
United  States 

Dutch  guilders 

Norwegian  kroner .  . . 

Swedish  kroner 

Spanish  pesetas 

Swiss  francs 

6,721 
4,392 
5,379 
13,324 
4,806 

2947 

1738 

1349 

914 

2374 

3,774 
2,654 
4,030 
12,410 
2,432 

Total 

34,622 

9322 

25,300 

The  arbitrage  transactions  of  American  dealers  during  the 
entire  period  of  control  of  exchange  (February  20,  1918,  to  June 
25,  1919)  amounted  to  almost  $3,000  million,  most  of  which  were 
handled  through  Great  Britain. 

Purchases  from  other  countries  through  arbitrage  by 

United   States   dealers $1,606,710,000 

Sales  to  other  countries  through  arbitrage  by  United 

States    dealers    1,296,454,000 

Excess  of  purchases  by  United  States  dealers  through 

arbitrage     310,256,000 

This  huge  excess  of  purchases  of  arbitraged  exchange  explains 
both  the  depreciation  of  the  dollar  and  of  the  Allied  currencies  on 
the  neutral  markets  as  well  as  the  stabilization  of  the  Allied  ex- 
changes in  New  York. 


(b)   Effect  on  Neutrals — 

The  one  remarkable  and  outstanding  effect  of  the  stabil- 
ization of  sterling  in  New  York  was  the  decline  on  the  neutral 
markets  of  the  exchanges  of  the  Allied  and  Associated  powers. 


PRINCIPLES   AND  PRACTICE  IN  THE   WORLD  WAR 


381 


I.  Trade  currents — In  the  trade  with  the  European  neutrals 
the  United  States  had  an  excess  of  exports,  as  shown  above,  and 
therefore  if  the  dollar  had  not  been  tied  to  the  Allied  currencies, 
it  should  have  been  at  a  premium  on  the  neutral  markets.  On 
the  other  hand  in  the  trade  with  the  South  American  countries 
the  United  States  had  an  excess  of  imports,  particularly  so  toward 
the  end  of  the  war.  In  these  countries  therefore  the  dollar  should 
have  been  at  a  slight  discount. 

The  significant  thing,  however,  is  that  the  trade  of  several 
neutral  countries  with  the  rest  of  the  world  showed  a  greater 
increase  of  exports  than  of  imports  during  the  war.  The  following 
had  an  excess  of  exports  over  imports:  Spain,  Sweden,  Argentina, 
Brazil,  and  Chile.  The  other  neutrals,  Norway,  Denmark, 
Holland  and  Switzerland,  had  an  excess  of  imports,  which  how- 
ever was  much  smaller  than  the  pre-war  figure. 

Excess  of  Exports  Before  and  During  the  War  ** 

(— )  excess  of  imports;  (+)  excess  of  exports 

(in  millions) 


Country 

Sweden 

Spain 

Argentina 

Brazil 

ChUe 


1913 


1917 


—  29  kroner 

—  248  pesetas 
+  23  pesos 

—  35  milreis 
+67  pesos 


+418  kroner  (1916) 
+577  pesetas 
+  169  pesos 
+299  milreis 
+357  pesos 


Excess  of  Imports  Before  and  Dxiring  the  War 
(in  millions) 


Country 

1913 

1917 

Denmark 

—  137  kroner 
-835  guilders 

-  543  francs 

—  49  kroner 

—  286  guilders 

—  82  francs 

Netherlands 

Switzerland 

On  the  other  hand,  corresponding  to  an  increase  in  the  balance 
of  exports  or  to  the  decrease  in  the  balance  of  imports  of  the 
neutrals,  the  imports  of  the  several  Allied  powers  greatly  increased, 
as  cited  above.  As  a  result,  the  Allied  exchanges,  tied  together, 
and  taken  as  a  whole,  depreciated  in  the  neutral  markets.  For 
instance,  during  the  calender  year   1917   Spain  had  an  excess  of 

"International  Commerce  and  Reconstruction,  pp.  317,  et  seq. 


382        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

exports  to  England  of  about  $82  million  and  of  over  $300  million 
in  her  trade  with  the  three  principal  European  belligerents. 

The  British  excess  of  imports  from  Spain  rose  from  the  equiva- 
lent of  about  $28  million  in  191 3  to  $130  million  in  191 8.  The 
French  excess  of  imports  from  Spain  rose  from  the  equivalent  of 
about  $25  million  in  191 3  to  about  $222  million  in  19 17.  The 
combined  value  of  the  British  and  French  excess  of  imports  from 
Spain  rose  from  the  equivalent  of  $53  million  in  1913  to  the 
equivalent  of  $303  million  in  1917.  On  the  other  hand  the  excess 
of  exports  from  the  United  States  to  Spain  rose  from  about  $8 
million  in  191 3  to  about  $43  million  in  1918.  The  establishment 
of  a  stabilized  pound  and  franc  in  New  York  tied  the  three  coun- 
tries into  a  trading  unit,  so  far  as  their  foreign  exchanges  were 
concerned.  Great  Britain,  France  and  the  United  States,  combined, 
had  a  net  excess  of  imports  from  Spain  equivalent  to  $45  million 
in  1913,  $263  million  in  1917,  and  $165  million  in  1918. 

Spain's  Balance  of  Trade  wtth  Leading  Allies  ** 

(in  million  dollars) 

(conversion  at  parity) 


1913 

1916 

1917 

1918 

British  excess  of  imports  from  Spain 

French  excess  of  imports  from  Spain 

28.0 
25.2 

72.3 
1340 

80.7 
222.0 

130S 
78.0 

Combined  British  and  French  excess 

53-2 

206.3 

302.7 

208.5 

United  States  excess  exports  to  Spain 

8.2 

25.0 

40.1 

42.6 

Combined  net  excess  of  imports  from  Spain  of 
United  States,  Great  Britain  and  France .... 

450 

181. 3 

262.6 

165.9 

2.  Difficulties  in  Allied  settlements  for  tr.^e  bal- 
ances— ^The  principal  means  of  settling  for  a  debit  balance  is  the 
shipment  of  goods.  The  Allies  were  unable  to  ship  goods  during 
the  war  to  the  neutral  countries  in  payment  of  their  purchases  of 
military  supplies.  In  many  cases  the  Allies  intentionally  withheld 
settlement  by  exports  for  fear  that  the  commodities  shipped  would 
ultimately  reach  Germany. 

The  second  factor  in  settlement  of  trade  balances,  likewise,  was 
not  available.     Gold  was  sent  to  New  York,   the  main  market 

""From  official  annual  returns  of  trade. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  383 

for  Allied  purchases  of  military  supplies.  The  object  was  not  only 
to  pay  for  purchases,  but  also  to  maintain  easy  credit  conditions 
and  to  facilitate  loans.  The  Allies  had  not  unlimited  gold  supplies 
and  thus  could  not  settle  for  all  their  excess  of  imports  by  means 
of  gold.  Furthermore,  several  of  the  neutrals  refused  gold  in 
payment  of  merchandise  debts.  The  Scandinavian  countries,  in 
which  there  was  a  great  scarcity  of  goods,  at  first  put  an  embargo 
on  the  importation  of  gold  and  later  accepted  it  only  at  a  discount 
of  8  per  cent,  because  the  increased  quantity  of  gold  coupled  with 
the  scarcity  of  commodities  caused  an  unsettling  rise  in  prices. 
Similarly  Spain  received  gold  at  a  discount  of  6  per  cent  below  its 
parity.  These  countries  preferred  to  have  settlement  in  merchan- 
dise rather  than  in  specie. 

Finally,  the  third  means  of  settlement,  securities,  was  not 
available.  The  neutral  countries  did  not  lend  to  the  Allies  to  settle 
for  their  excess  of  imports,  partly  out  of  fear  of  Germany  and 
partly  because  of  the  war-time  restrictions  on  the  issue  and  move- 
ment of  securities. 

3.  Arbitrage  in  Allied  exchanges — ^The  dollar  depreciated 
as  a  result  of  the  arbitrage  operations  in  the  Allied  exchanges. 
Before  the  war  arbitrage  eliminated  differences  in  the  quotation  of 
any  currency  on  two  or  more  markets.  Speculators  transferred 
their  credits  from  one  financial  center  to  another  and  would  buy  a 
currency  in  the  cheap  market  and  sell  it  in  the  dear  market.  These 
operations  stabilized  exchange  before  the  war.  The  margin  of 
profit  was  very  close  and  the  fluctuations  in  exchange  were  kept 
within  very  narrow  bounds. 

a.  Mode  of  operation — During  the  war  the  differences  were 
much  wider  and  the  profit  correspondingly  greater.  Foreign  ex- 
change operators  bought  sterling,  francs  and  lire  in  the  neutral 
free  markets  and  sold  them  in  the  "pegged"  New  York  market. 
An  importer  of  Madrid  who  bought  goods  in  England  and  agreed 
to  pay  for  them  in  London  might  remit  directly  by  purchasing 
depreciated  sterling  in  Madrid  or  else  he  might  buy  dollars  in 
Madrid  and  sell  these  dollars  in  New  York  and  buy  sterling 
which  he  would  forward  to  London  in  settlement  of  his  purchase. 
The  sales  of  dollars  in  New  York  depressed  the  dollar  in  terms  of 
pesetas.  Similarly  a  Spanish  merchant  who  exported  to  England 
and  was  paid  in  sterling  might  sell  depreciated  sterling  in  Madrid 
or  else  sell  sterling  in  New  York,  where  it  was  "pegged,"  and 


384        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


obtain  dollars  and  sell  dollars  in  Madrid.  The  fact  that  the  ex- 
porter had  the  choice  of  operating  either  directly  between  London 
and  Madrid  or  indirectly  via  New  York  made  the  dollar  fall  and 
the  pound  sterling  rise. 

b.  The  defeat  of  the  aim  of  stabilization — ^As  a  result  of  arbi- 
traging  the  dollar  and  the  pound  the  neutrals  were  able  to  defeat 
the  aim  of  the  "peg,"  which  w^as  to  maintain  an  artificial  purchas- 
ing power  for  the  Allied  currencies.  The  neutrals  who  operated 
for  a  profit  were  accused  by  the  Allied  powers  of  unfriendly  acts. 
However,  close  supervision  by  the  Foreign  Exchange  Division  of 
the  Federal  Reserve  Board  prevented  the  enemy  powers  from 
obtaining  credits  or  depressing  dollars  by  the  sale  of  American  or 
Allied  securities  through  the  agency  of  neutrals.  The  defeat  of 
the  aim  of  the  "peg"  was  not  the  result  of  enemy  activities,  but 
purely  the  result  of  the  operation  of  economic  laws.  The  neutrals 
bought  sterling  in  a  market  where  it  was  in  excess  and  sold  it  in 
a  market  in  which  an  artificial  demand  was  created  for  it. 

c.  The  effect  of  arbitrage — The  extent  of  the  resulting  depre- 
ciation of  the  dollar  abroad,  or  of  the  premium  of  the  neutral 
currencies  in  New  York,  was  striking.  In  November,  191 7, 
Swedish  kroner  were  at  a  premium  of  about  70  per  cent  in  New 
York  and  in  April,  191 8,  Spanish  pesetas  were  at  a  premium  of 
about  54  per  cent. 

Premixjms  on  Neutral  Currencies  in  New  York  ^^  During  the  Period 

OF  THE  "Peg" 


Currency  of — 

Highest  Premium  between 
April,  1917,  and  July  31,  1918 

Highest  Premium, 
July,  1 918 

When  reached 

Per  cent 

Per  cent 

Sweden 

Nov.,  1917 
Nov.,  1917 
Nov.,  191 7 
July,    19 1 8 
May,  1 9 18 
April,  1918 
Sept.,  1917 
July,    1918 
June,  1918 
July,    1918 
Dec,  1917 

69.78 
44-59 
44-59 
29-35 
35-28 

54-15 
22.30 
7.82 
78.24 
20.83 
10.  25 

33  58 
17.01 

Norway 

Denmark 

16.79 
29.3s 

Holland 

Switzerland 

Spain 

31  SO 
42.7<> 

India 

10.14 

Japan 

7.82 

Argentina 

75-48 

Peru 

Bolivia : 

2 

20.83 
8.84 

"Annual  report 


PRINCIPLES    AIH)   PRACTICE   IN   THE    WORLD   WAR  385 

4.  Heavy  flow  of  gold  to  neutrals — Dealers  remitted 
sterling  exchange  to  New  York  from  all  parts  of  the  world  to 
make  a  profit.  Although  Great  Britain  restricted  the  exports  of 
gold,  the  neutrals  were  able  to  evade  this  restriction  by  getting 
gold  for  their  sterling  in  New  York.  As  a  result,  there  was  a 
very  heavy  outflow  of  gold  during  July,  August,  and  September, 
191 7,  to  the  countries  where  the  dollar  was  artifically  depreciated. 
This  movement  was  in  conformity  with  economic  law  but  defeated 
the  Allied  aim.  To  sustain  her  exchange  rate  in  New  York, 
Great  Britain  had  to  borrow  money  there  and  it  was  to  her  interest 
that  gold  should  remain  in  the  United  States  and  thus  maintain  an 
easy  market.  On  the  other  hand  officials  of  the  Treasury  and  of  the 
Federal  Reserve  Board  realized  that  the  gold  holdings  of  the 
United  States  were  being  depleted  to  settle  for  the  excess  of  imports 
of  the  Allies.^^ 


c.   The  Effect  on  the  United  States — 

1.  Depreciation  of  dollars — The  New  York  rate  reflected 
the  effects  of  the  "peg"  on  the  Allied  and  neutral  currencies 
described  above.  They  are  summarized  briefly  here.  The  Allied 
exchanges  were  supported  at  an  artificially  high  level  in  New  York, 
the  neutrals  bought  the  depreciated  pounds,  francs  and  lire  in 
their  own  markets  and  sold  them  in  New  York.  Great  Britain 
was  the  pivot  of  arbitrage  operations  in  New  York.  American 
dealers  obtained  neutral  currencies  through  Great  Britain  and 
the  neutrals  sold  much  sterling  in  New  York. 

2.  America  paymaster  for  the  Allies — New  York  set- 
tled for  all  the  Allies.  The  world's  balances  of  sterling,  francs 
and  lire  were  transferred  to  New  York.  Restrictions  by  the 
Allied  powers  on  the  exports  of  gold  narrowed  the  market  for 
settlement  of  gold  balances  to  New  York.  As  a  result,  as  described 
above,  there  were  very  heavy  gold  exports  from  the  United  States, 
the  excess  of  which  over  imports  amounted  to  about  $100  million, 


"A  full  discussion  of  the  effects  of  the  "peg"  on  neutral  exchange 
is  found  in  hearings  before  the  Committee  on  Banking  and  Currency  of 
the  United  States  Senate,  65th  Congress,  2d  Session;  on  S.  3928,  "A  Bill 
to  Amend  the  Federal  Reserve  Act  and  Create  a  Federal  Reserve  Foreign 
Bank."     (Washington:  Government  Printing  Office,   1918.) 


386        INTERNATIONAL   FINANCE    ANT)    ITS    REORGANIZATION 

during  July,  August,   and  September,    1917.^*     The  distribution 
of  exports  by  countries  was  as  follows: 


Gold  Exports  from  the  United  States  in  19 17 
(in  million  dollars) 


Country 

Spain 

South  America 

Japan 

India 


July 


August 


September 


7 

37 

3 


IS 

20 
3 


13 
3 


3.  Gold  embargo — This  gold  movement  was  contrary  to  the 
individual  interests  of  Great  Britain,  the  United  States,  and  of  the 
other  Allies,  for  some  of  the  gold  exported  might  ultimately 
reach  the  enemy  powers.  To  check  the  outflow  an  embargo  was 
declared  by  the  President  on  September  7,  191 7,  and  further 
exports  were  licensed  and  put  under  the  regulation  of  the  Federal 
Reserve  Board. 

4.  Commercial  effects  of  the  "peg" — As  a  result  of  the 
"peg"  the  American  merchant  received  fewer  pounds  sterling  for  his 
goods  or  less  of  British  goods  in  exchange  than  he  would  other- 
wise have  received.  However,  in  American  currency,  the  exporter 
selling  goods  abroad  received  the  same  number  of  dollars  for  his 
merchandise  regardless  of  where  it  was  sold.  The  price  was  deter- 
mined internationally  and  was  the  same  for  all  purchasers,  whether 
in  countries  with  appreciated  or  depreciated  currencies.  However, 
purchasers  whose  currency  was  "pegged"  were  able  to  buy  more 
American  goods  than  if  it  were  not  "pegged."  This  was  desirable 
as  a  war  policy.  The  Allies  had  to  have  munitions  of  war.  But 
it  was  not  desirable  that  the  Allies  should  be  able  to  buy  non- 
military  supplies  in  the  American  market  at  an  advantageous  rate. 
However,  the  War  Trade  Board  restricted  the  export  of  non- 
essentials and  this  advantage  to  the  foreigner  was  eliminated.  By 
lowering  prices  in  terms  of  "pegged"  currency,  the  "peg"  tended 


*^  Annual  Report  of  the  Secretary  of  the  Treasury,  1917,  p.  26. 
Annual  Report  of  the  Federal  Reserve  Board  for  1917,  p.  2a 


PRINCIPLES    AND   PR.\CTICE    IN   THE    WORLD   WAR  387 

to  increase  the  demand  for  American  goods,  and  thus  raised  prices 
in  the  United  States. 

The  American  importer  paid  more  dollars  for  goods  from 
Great  Britain  than  if  sterling  had  not  been  "pegged."  For  the 
same  reason,  he  paid  more  in  dollars,  or  in  dearer  guilder  for  Dutch 
goods.  So  far  as  the  imports  were  essential,  the  prices  of  Allied 
and  neutral  goods  were  raised  to  the  American  consumer  by  reason 
of  the  "peg"  of  the  pound  sterling,  and  the  Allied  supply  houses 
received  money  of  a  larger  purchasing  power  than  their  own.  The 
same  applies  to  the  neutrals. 

iii.  Correctives  of  the  Depreciation  of  the  Dollar  on 
Neutral  Markets 

a.  Proposed  correctives — The  depreciation  was  undoubtedly 
disturbing  to  the  commercial  interests  in  the  United  States.  Dis- 
regarding the  vital  fact  that  military  considerations  were  primary, 
a  few  merchants  with  the  aid  of  a  senator  proposed  several  in- 
feasible  measures  to  correct  the  depreciation  of  the  dollar  in  the 
neutral  markets.®^ 

I.  The  prohibition  of  arbitrage — To  :orrect  the  deprecia- 
tion of  the  dollar,  it  was  proposed  that  the  sale  by  neutrals  of  the 
pound  sterling  for  dollars  be  prohibited  and  that  the  merchants  of 
neutral  countries  be  compelled  to  buy  dollars  with  their  native  cur- 
rency. In  view  of  the  fact  that  the  United  States  had  an  excess  of 
exports  in  its  trade  with  most  neutral  countries  the  prohibition  of 
arbitrage  would  have  changed  the  discount  on  the  dollar  to  a 
premium  in  these  neutral  countries. '^^ 

The  proposal  would  have  proven  unworkable,  as  W.  P.  G. 
Harding,  Governor  of  the  Federal  Reserve  Board,  indicated  in 
his  testimony.^^ 

'"The  prime  mover  behind  this  propaganda  was  an  American  importer 
who  was  short  of  neutral  exchange  on  a  rising  market. 

'"This  proposal  was  sponsored  by  Senator  Robert  L.  Owen,  Chairman 
of  the  Committee  on  Banking  and  Currency  in  the  65th  Congress  and 
solely  as  a  war  measure  by  some  business  men,  notably  Mr.  Leopold 
Frederick,  Treasurer  of  the  American  Smelting  &  Refining  Co.  It  was 
quoted  with  approval  in  an  editorial  in  the  New  York  Times,  June 
30,   1918. 

"Hearings  on  S.3928,  65th  Congress,  2d  Session,  Government  Printing 
Office,  Washington,  1918,  p.  353. 


388       INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

He  pointed  out  that  the  United  States  could  not  apply  this 
remedy  because  of  the  lack  of  control  of  exchange  dealings  in 
foreign  countries.  The  United  States  could  prevent  a  Spanish 
exporter  from  selling  sterling  in  New  York,  but  it  could  not 
prevent  his  London  agent  from  selling  pesetas  for  sterling  and  then 
selling  sterling  in  New  York.  The  proposal  would  have  lessened 
the  use  of  the  dollar  as  a  medium  of  exchange  and  increased  the 
exchange  transactions  in  London. 

The  proposal  to  prohibit  arbitrage  was  similar  to  an  alternative 
plan  to  compel  American  exporters  to  sell  their  goods  in  the 
currency  of  the  neutral  country.  In  view  of  the  fact  that  the 
United  States'  exports  to  neutrals  exceeded  the  United  States' 
imports  from  neutrals,  there  would  have  been  an  abundance  of 
neutral  exchange  in  New  York.  The  amount  might  have  been 
adequate  to  furnish  dollars  to  settle  for  American  imports,  but  not 
to  settle  for  the  combined  Allied  excess  of  imports  from  the 
neutral  countries,  which  was  the  basis  of  the  inter-Allied  financial 
unity.  Both  these  proposals  might  have  controlled  the  depreciation 
of  the  dollar  but  the  harm  resulting  would  have  been  far  greater 
than  the  good  accomplished  and  the  prohibition  would  have  been 
detrimental  to  our  foreign  financial  position  after  the  restoration 
of  peace.  It  was  fortunate  that  the  United  States  did  not  have 
to  resort  to  either  of  the  proposed  remedies.'^^ 

2.  The  TAX  ON  exports  to  neutrals — Another  proposal 
was  to  place  a  tax  on  all  goods  exported  to  the  neutral  countries, 
the  rate  being  equivalent  to  the  premium  on  the  neutral  currency 
or  the  discount  on  the  dollar.  This  proposal  was  economically 
unsound,  diplomatically  impracticable,  and  politically  impossible. 
Export  taxes  are  prohibited  under  the  Constitution. 

3.  A  Federal  Reserve  foreign  bank — ^Another  remedy  pro- 
posed was  the  establishment  of  a  Federal  Reserve  foreign  bank, 
whose  powers  should  be  identical  with  those  allowed  to  the  Federal 
Reserve  Bank,  under  Sec.  14,  a,  b,  c,  and  d  of  the  Federal 
Reserve  Act,  including  the  power  to  deal  in  gold  and  silver,  coin 
and  bullion,  to  buy  and  sell  bonds  and  notes  of  the  United  States 
and  foreign  governments  with  maturity  not  exceeding  six  months 

"Annual  report  of  the  Federal  Reserve  Board  for  1918,  p.  55. 


PRINCIPLES    AND   PRACTICE    IN  THE   WORLD   WAR  389 

from  the  date  of  purchase,  to  buy  and  sell  bills  of  exchange,  and 
to  establish  rates  of  discount/^ 

The  proposal  met  with  strenuous  opposition  on  the  part  of 
leading  bankers  and  students  of  finance.  They  pointed  out  that  the 
bank  would  serve  no  purpose  which  could  not  be  accomplished 
by  the  existing  organization  and  that  it  would  embarrass  nego- 
tiations with  foreign  treasuries  then  under  waJ^  The  stabilization 
of  foreign  exchange  by  the  British  government  was  effected  not 
through  new  mechanism,  but  through  the  application  of  accepted 
methods,  namely  the  shipment  of  gold,  loans,  and  the  resale  of 
securities  in  the  market  where  the  pound  sterling  was  depreciated. 

The  attempt  to  stabilize  exchange  by  any  other  methods  is 
artificial.  Exchange  rates  are  indicators  of  economic  conditions. 
Differences  of  exchange  rates  reflect  the  trade  balances  both 
visible  and  invisible,  as  well  as  the  condition  of  the  credit  cf  the 
country  and  the  effect  of  various  methods  of  war  finance.'^*  It  is 
idle  to  try  to  equalize  exchanges  unless  it  is  possible  to  control 
the  differences  in  the  credit  of  the  nations,  their  gold  reserves  and 
their  methods  of  finance. ^^ 

b.  Fundamental  difficulty — ^The  prime  aim  during  the  war 
was  to  win  the  victory.  In  the  pursuit  of  this  aim  the  United 
States  government  permitted  the  "pegging"  of  the  Allied  ex- 
changes in  New  York.  American  commercial  interests  in  the  neutral 
countries  were  somewhat  unsettled  in  consequence  of  tying  the 
dollar  to  the  depreciated  Allied  currencies.  The  United  States 
alone  could  not  settle  for  the  excess  of  imports  of  all  the  Allies. 

I.  Impossibility  of  trade  settlement — The  commercial 
policy  of  all  the  belligerents  was  determined  by  military  considera- 
tions. The  aims  of  the  war  trade  policy  of  the  United  States  were 
(a)  the  conservation  of  domestic  supplies  for  the  use  of  the  United 
States  and  of  the  Allied  nations  (b)  prevention  of  trade  directly 
or  indirectly  by  persons  in  the  United  States  with,  for  the  benefit 
of,  or  in  behalf  of  the  enemy  or  its  agents  (c)  conservation  of 
tonnage    for    the    transportation    of    military    necessities    for    the 

"  8:3928,  65th  Congress,  2d  Session,  introduced  by  Senator  Robert  L. 
Owen  of  Oklahoma,  Chairman  of  the  Committee  on  Banking  and  Currency. 

"A  clear  statement  of  the  difficulties  in  leveling  the  international 
exchanges  is  contained  in  the  annual  report  of  the  Secretary  of  the 
Treasury  for  1919,  p.  13.  See  also  Finance  in  the  War,  address  to  Na- 
tional Foreign  Trade  Council,  April  18,  1918,  by  Fred  I.  Kent,  Director, 
Division  of  Foreign  Exchange,  Federal  Reserve  Board. 


3  go        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

United  States  and  the  Allies.^^  The  war  trade  policy  was  con- 
cerned less  with  keeping  dollar  exchange  at  par  in  the  neutral 
countries  (which  were  a  minor  factor  even  from  the  commercial 
point  of  view)  than  with  maintaining  an  adequate  supply  of  es- 
sential materials  for  the  United  States  and  the  Allies.  Only 
after  the  satisfaction  of  these  requirements  was  any  surplus  to  be 
made  available  for  consumption  in  neutral  countries. 

2.  Unavailability  of  securities — Another  method  of  set- 
tling for  an  excess  of  Allied  imports  was  by  means  of  securities. 
To  accomplish  this  aim  it  would  have  been  necessary  for  the  United 
States  to  contract  loans  in  the  neutral  countries  equal  to  the  extent 
of  the  combined  excess  of  the  imports  of  the  Allies.  This 
obviously  was  impossible. 

3.  Insufficiency  of  gold — Similarly  the  United  States 
could  not  ship  gold  to  settle  for  the  Allied  excess  of  imports. 
There  was  not  enough  gold  in  the  United  States  to  make  such 
a  settlement  feasible.  In  short,  the  military  policy  made  it  im- 
possible for  the  United  States  alone  to  utilize  any  of  the  accepted 
means  of  settling  a  trade  balance  or  of  righting  a  depreciated 
exchange.  The  movement  of  commodities  was  restricted  by  the 
War  Trade  Board  in  the  interests  of  military  policy.  The  United 
States  could  not  borrow  in  the  neutral  countries  or  sell  them 
securities  in  sufficient  amount  to  balance  the  combined  excess  of 
Imports  of  the  Allies.     Nor  could  it  ship  gold  for  this  purpose. 

c.  Correctives  in  ejfect — The  officials  of  the  Treasury  and  of 
the  War  Trade  Board  of  the  United  States  realized  the  difficulties 
of  the  situation. ■'*' 

Subject  to  the  limitation  of  tonnage  and  other  war  requirements, 
it  was  most  important  to  pay  our  adverse  foreign  balances  through  the 
export  of  commodities  otherwise  nonessential,  and  this  consideration 
was  urged  upon  those  departments  of  our  Government  having  such 
matters  in  hand. 

"Report  of  the  War  Trade  Board,  pp.  12-13,  Washington,  Govern- 
ment Printing  Office,  1920. 

"Annual  Report  of  the  Secretarj'  of  the  Treasury,   1918,  p.   38. 

Testimony  of  Assistant  Secretary  R.  C.  Leffingwell  before  the  Ways 
and  Means  Committee  of  the  House  on  the  amended  Second  Liberty  Bond 
Act,  September  12,  1918.     Federal  Reserve  Bulletin,  October,  1918,  p.  942. 

A  brief  summary  of  these  operations  is  given  in  an  address  on  the 
Federal  Reserve  System,  at  Princeton  University,  January  21,  1921,  by 
Albert  Strauss,  sometime  member  of  the  War  Trade  Board,  representing 
the  Treasury,  and  Vice-governor  of  the  Federal  Reserve  Board. 


PRINCIPLES   AND   PRACTICE   IN  THE   WORLD   WAR  39I 

While  the  United  States  supported  the  exchange  of  France,  Great 
Britain  and  Italy,  exports  were  almost  equally  valuable  from  a  purely 
exchange  standpoint,  -whether  made  by  the  United  States  or  by  such 
countries.  Those  countries  have  been  importing  vastly  more  than 
they  could  export,  so  there  was  ample  tonnage  for  any  exports  they 
were  able  to  make.  The  need  for  tonnage  for  carrying  v»ar  supplies 
from  the  United  States  was  so  great  as  to  make  it  difficult  to  provide 
shipping  space  for  exports  from  the  United  Statss  to  European  neutrals 
that  did  not  own  shipping.  The  matter  of  exports  to  European  neutrals 
contiguous  to  the  central  powers,  whether  or  not  they  owned  shipping, 
was  controlled  by  considerations  of  blockade.  The  possibilities  of 
exports  to  the  other  parts  of  the  world  were  limited  to  the  outward 
voyage  of  the  tonnage  required  to  bring  back  needed  imports  to  this 
country. 

Foreign  loans  and  credits  constitute  a  means  of  temporarily  re- 
lieving the  exchange  situation  and  by  postponement  afford  an  oppor- 
tunitj'  to  obtain  relief  by  means  of  proper  trade  measures.  The  Treas- 
ury has  urged  upon  the  Governments  of  the  Allies  the  necessity  of 
their  obtaining  neutral  currencies  through  loans  or  credits  or  the  sale 
of  the  foreign  securities  which  they  held.  The  Treasury  also  itself 
eflFected  arrangements  for  stabilizing  exchange  in  a  number  of  neutral 
countries. 

The  only  effective  remedies  available  were  credits  from  the 
neutrals,  borrowing  not  only  by  the  United  States,  but  by  all  the 
Allies.  International  cooperation  was  as  necessary  in  correcting 
the  exchanges  as  it  was  in  "pegging"  the  exchanges. 

I.  Borrowings  by  the  United  States— 

a.  The  law — Recognizing  the  need  for  correcting  the  ex- 
changes by  borrowing  abroad  Congress  enacted  legislation  for  this 
purpose.  Section  16  of  the  Second  Liberty  Loan  Act  authorized 
the  Secretary  of  the  Treasury  to  issue  bonds  or  certificates  of 
indebtedness  payable,  principal  and  interest,  in  any  foreign  currency, 
and  he  was  authorized  to  designate  depositaries  in  foreign  coun- 
tries with  which  the  proceeds  might  be  deposited. 

Section  4  of  this  Act,  as  amended,  authorized  the  Secretary  of 
the  Treasury  during  the  war  and  for  two  years  after  its  termination 
to  make  arrangements  in  or  with  foreign  countries  to  stabilize 
the  foreign  exchanges  and  to  obtain  currencies  and  credits  in  such 
countries  for  this  purpose. 

The  War  Finance  Corporation  Act  also  contained  a  clause 
inserted  at  the  request  of  the  Treasury  Department,  which  author- 
ized the  Corporation  to  issue  bonds  payable  in  foreign  money  or 
payable  at  the  option  of  the  holders  either  in  dollars  or  in  foreign 
money,  at  a  fixed  rate  of  exchange. 


392        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

b.  Loans  negotiated — 

I.  Neutrals  of  Europe — .v.  Spain — A  group  of  Spanish  bankers 
opened  a  credit  about  $48  million,  in  favor  of  the  United 
States.  Spain  was  assured  of  her  necessary  supplies  of  cotton  and 
oil,  the  amount  being  fixed  at  such  a  figure  as  would  cover  the 
minimum  Spanish  requirements  but  would  prevent  "future"  pur- 
chases by  German  agents.  On  the  other  hand  the  United  States 
forces  in  Europe  received  immediate  delivery  of  200,000  woolen 
blankets,  20,000  tons  of  leather,  100,000  tons  of  chick  peas,  and 
other  military  necessities.  Furthermore,  American  credit  assisted 
the  French  government  in  securing  additional  credit  in  Spain. 

The  Bank  of  Barcelona,  and  the  Bank  Urquijo  granted  the  loan 
on  September  7,  1 91 8,  under  the  following  conditions:  The  maxi- 
mum amount  of  the  credit  was  about  250  million  pesetas  to 
be  drawn  between  October  i,  1918,  and  July  i,  1919,  at  a  rate 
not  exceeding  50  million  pesetas  monthly.  The  credit  was  in  the 
form  of  bills  of  exchange  drawn  by  American  bankers  against  the 
Spanish  banks  in  the  syndicate.  Payment  was  to  be  made  at 
maturity  either  in  pesetas  or  in  gold  coin  or  bullion  at  parity.  If 
the  Spanish  banks  should  not  accept  payment  in  gold  because  the 
Bank  of  Spain  refused  to  receive  it  at  par,  the  bills  would  be  ex- 
tended for  six  months  in  order  that  settlement  might  be  in  peseta 
bills. 

As  a  condition  of  the  loan  equivalent  amounts  of  American 
bonds  were  to  be  deposited  payable  in  pesetas  or  in  gold  and  with 
the  same  maturity  as  the  bills  of  exchange.'''^ 

As  security  for  the  credit  between  the  banks  the  Treasury  De- 
partment furnished  certificates  of  indebtedness  payable  in  pesetas. 
The  total  amount  of  private  credits  drawn  and  public  obligations 
sold  amounted  to  155  million  pesetas.  As  Spanish  exchange  de- 
clined, the  Treasury  Department  reduced  its  obligations  to  80  mil- 
lion pesetas  by  purchases  in  the  exchange  market  at  parity  or  less.'^ 
On  February  28,  1920,  the  certificates  of  indebtedness  were  com- 
pletely paid  for  at  a  substantial  profit  to  the  government  because 
pesetas  had  declined  below  parity.  This  is  the  only  foreign  indebt- 
edness incurred  by  the  United  States  during  the  war.^^ 

"London  Economist,  Sept.  28,  1918. 

'^Report  of  the  Secretary  of  the  Treasury,  1919,  pp.  66-67. 

"Annual  Report  of  the  Secretary  of  the  Treasury,  1920,  p.  67. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  393 

y.  Switzerland — Arrangements  were  made  whereby  Switzer- 
land placed  at  the  disposal  of  the  United  States  Treasury  about  75 
million  Swiss  francs  in  return  for  dollars  at  par,  although  dollar 
exchange  was  at  a  discount  in  Switzerland.  The  object  was  to  per- 
mit the  purchase  in  Switzerland  of  goods  necessary  for  the  Ameri- 
can Expeditionary  Force.  Limitations  were  set  as  to  the  time  and 
amount  of  advances,  which  were  restricted  to  government  purchases. 

z.  Scandinavian  countries — Arrangements  were  also  made  with 
Norway  and  Sweden.  They  did  not  open  a  credit  in  favor  of  the 
United  States  Treasury,  but  they  did  permit  the  proceeds  of  exports 
from  the  United  States  to  Norway  and  Sweden  to  be  deposited  in 
dollars  at  par  in  the  national  banks  of  Norway  and  Sweden  for  the 
use  of  the  Federal  Reserve  Bank  of  New  York.  The  War  Trade 
Board,  on  the  other  hand,  granted  export  licenses  on  shipments  con- 
signed to  Norway  and  Sweden  only  on  the  condition  that  the  pro- 
ceeds would  be  so  deposited.  The  effect  was  to  give  the  United 
States  currency  purchasing  power  at  parity  and  thus  lessen  the 
premium  on  kroner  in  New  York  or  the  discount  on  dollars  in 
Norway  and  Sweden.  The  stimulus  on  exports  in  the  United 
States  and  the  check  on  exports  from  Norway  and  Sweden  were 
thus  removed. 

2.  Neutrals  of  South  America — The  depreciation  of  the  dollar 
in  South  America  was  due  not  only  to  the  "pegging"  of  exchange 
and  to  the  combined  excess  of  imports  of  the  Allies  from  the  South 
American  countries,  but  more  directly  to  the  excess  of  imports  by 
the  United  States  alone.  In  19 17  the  excess  of  imports  of  the 
United  States  from  Argentina  was  $70  million.  In  191 8  it 
was  $122  million.  The  excess  of  imports  of  the  United  States  from 
Chile  in  1917  was  $86  million  and  in  1918  $100  million.  The 
total  trade  of  these  countries  showed  a  large  favorable  balance. 
Argentina  had  an  excess  of  exports  equivalent  to  $20  million  in 
1916,  and  $164  million  in  1917.  Chile  had  an  excess  of  exports  in 
the  same  years  equivalent  to  $106  and  $130  million,  respectively.^® 
As  a  result  of  both  the  American  and  Allied  excess  of  imports 
from  these  countries,  dollars  depreciated  in  South  America. 

X.  Argentina — In  January,  191 8,  an  arrangement  with  the  Ar- 
gentine government  was  efifected  whereby  the  exchange  between 
the  two  countries  was  stabilized.  Under  the  arrangement  Ameri- 
can importers  owing  money  to  Argentine  merchants  paid  it  to  the 

"International  Commerce  and  Reconstruction,  pp.  332-334. 


394        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Argentine  Ambassador  in  the  United  States,  who  deposited  the 
amount  with  the  Federal  Reserve  Bank  in  New  York.  The  Ar- 
gentine government  on  its  part  agreed  that  the  accumulated  balance 
on  this  account  need  not  be  shipped  in  gold  until  the  Treaty  of 
Peace  had  been  ratified  and  on  its  part  the  American  government 
agreed  to  interpose  no  obstacle  to  the  necessary  gold  exports.  The 
amounts  deposited  with  the  Federal  Reserve  Bank  included  an 
additional  3  per  cent  to  cover  the  cost  of  anticipated  future  gold 
shipments.  The  original  amount  of  the  credit  was  $40  million.^^ 
In  March,  191 8,  this  credit  was  exhausted  and  subsequently  in- 
creased to  $100  million.^^ 

y.  Other  South  American  Countries — An  arrangement  similar 
to  that  with  Argentina  but  limited  to  $5  million  with  an  agreement 
to  extend  it  to  a  total  of  $20  million,  was  concluded  with  Bolivia. 
A  credit  of  $15  million  was  opened  with  Peru,  in  order  to  avoid 
the  shipment  of  gold  from  the  United  States  during  the  period 
of  the  embargo.  The  arrangement  called  for  a  premium  of  3  per 
cent,  to  cover  the  future  charges  for  shipping  of  gold.  Exchange 
on  Peru  was  obtainable  by  American  importers  by  making  a  deposit 
of  dollars  with  the  Federal  Reserve  Bank  of  New  York  to  the 
credit  of  the  Junta  de  Vigilancia  de  la  Emision  de  Cheques  Cir- 
culares  of  Peru.  Upon  receipt  of  such  deposit,  commission,  cable 
charges,  and  guaranty,  the  Federal  Reserve  Bank  cabled  the  Peru- 
vian bank  to  pay  the  equivalent  of  the  deposit  in  Peruvian  funds 
to  the  party  in  Peru  designated  by  the  depositor.  The  rate  was 
$5.01^  for  each  Peruvian  pound,  or  a  premium  to  cover  the  cost 
of  shipping  gold  of  3  per  cent  above  the  parity  of  $4.8665.^^ 

Similar  arrangements  were  effected  with  Uruguay,  and  nego- 
tiations with  Chile  were  under  way  but  were  never  completed. 

3.  Japan — Before  the  United  States  placed  an  embargo  on  gold 
exports,  the  settlement  of  the  Allied  excess  of  imports  from  Japan 
was  effected  by  means  of  gold  shipments  from  the  United  States. 
When  the  embargo  went  into  effect  Japanese  holdings  of  Allied 
exchanges  accumulated  in  New  York.  In  September,  1 91 8,  the 
Japanese  government  issued  exchequei  bonds  to  the  amount  of  lOO 
million  yen,  equivalent  to  $50  million,  for  the  purpose  of  buying  the 

"  United  States  Treasury  announcement  Jan.  8,  1918,  reported  m  the 
press. 

^  Hon.  R.  C.  Leffingwell's  testimony,  ibid. 

"*  Federal  Reserve  Board  announcement,  Dec.  26,  1918. 


PRINCIPLES   AND   PRACTICE   IN   THE   WORLD   WAR  395 

foreign  bills  held  by  Japanese  subjects.^*  The  amount  of  dollar 
exchange  kept  on  accumulating  and  in  June,  1919,  the  Japanese 
government  bought  $130  million  of  United  States  treasury  certif- 
icates of  indebtedness  with  the  funds  obtained  by  the  purchase  of 
dollar  exchange  from  its  subjects.  These  treasury  certificates  did 
not  constitute  a  special  issue  as  in  the  case  of  Spain. 

2.  Borrowing  by  the  Allies — a.  Spanish  loans  to  France — 
But  borrowings  by  the  United  States  could  not  settle  for 
the  combined  excess  of  imports  of  the  Allies.  The  problem 
was  not  American;  it  was  international.  This  was  made  clear 
in  the  hearings  on  question  of  establishing  a  Federal  Reserve 
foreign  bank.  Witnesses  versed  in  finance  tried  to  show 
the  advocates  of  an  exchange  bank  that  the  United  States 
alone  could  not  hope  to  solve  the  problem  that  the  cooperation  of 
all  the  Allies  was  required.  The  United  States  Treasury  officials 
urged  upon  the  Allies  the  importance  of  opening  credits  in  the 
neutral  countries  in  which  their  exchanges  were  depreciated.  The 
credit  negotiations  between  the  United  States  and  Spain  were 
merely  part  of  general  negotiations  of  the  Allies  with  Spain.  A 
trade  agreement  between  France  and  Spain  provided  for  the  move- 
ment of  special  commodities  of  which  Spain  had  a  surplus  and  the 
importation  into  Spain  of  commodities  of  which  there  was  a 
shortage.  On  the  other  hand  a  group  of  Spanish  bankers  agreed 
to  open  a  credit  in  favor  of  a  group  of  French  bankers  for  an 
amount  not  to  exceed  350  million  pesetas.^^  This  credit  remained 
unpaid  in  December,  1920. 

England  likev/ise  borrowed  extensively  in  Spain. 

b.  Argentine  loans  to  the  Allies — In  January-,  1918,  Argentina 
opened  a  credit  in  favor  of  Great  Britain  and  France  to  the  extent 
of  $200  million  payable  in  two  years.  The  credit  was  to  cover 
the  exportation  of  wheat,  corn,  oats,  flaxseed,  and  beef.  The  large 
advances,  running  into  billions,  by  the  United  States  government 
undoubtedly  influenced  Argentina's  position  in  the  matter.^*^  After 
the  war  Great  Britain,  France,  and  Italy  applied  to  Argentina  for 

"Announcement  of  the  Financial  Commission  in  the  United  States  of 
the  Japanese   Government,   Sept.  22,   1918. 

''  For  a  discussion  of  the  financial  and  commercial  aspects  see  Inter- 
national Commerce  and  Reconstruction,  pp.  78-80. 

*' Argentine  correspondence  of  the  London  Economist  during  January, 
1918. 


396        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

a  loan  of  200  million  pesos.  Although  the  convention  was  signed 
the  Argentine  Senate  refused  to  ratify  it  and  after  many  changes 
the  form  of  the  loan  was  changed  in  a  manner  unacceptable  to  the 
borrowers.^^ 


(d)    The  Effects  on  Rates — 

The  effect  of  borrowing  by  the  United  States  and  by  the  Allies 
was  to  lessen  the  premium  on  exchange.  Undoubtedly  the  military 
events  preceding  the  final  collapse  of  Germany  had  a  potent  in- 
fluence in  accelerating  the  reduction  of  the  premium  of  the  Allied 
currencies  in  the  neutral  market. 

The  highest  premium  attained  in  July,  19 18,  and  the  premium 
on  November  15,  191 8,  are  given  in  the  table  below. 

Premium  on  the  Neutral  Exchanges  ** 


Currency  of- 


Highest  premium, 
July,  1918 
Per  cent 


Premium, 

Nov.  15,  igif 

Per  cent 


Sweden. . . . 
Norway. . . , 
Denmark . . , 
Holland.  .  .  . 
Switzerland 

Spain 

India 

Japan 

Argentina.  . 

ChUe 

Peru 

Bolivia 


33.58 

17 

91 

16 

79 

29 

35 

31 

50 

42 

75 

10 

14 

7 

82 

5 

61 

75 

84 

20 

83 

8 

84 

355 
1.68 

0.7s 
3-86 
3.21 

363 
10. 14 

9-33 

504 

31 -54 

3.10 

1-54 


G.  The  Abandonment  of  Stabilization  Expedients 

i.  Decontrol  of  Exchange 

The  release  of  the  support  of  sterling  exchange  took  place  first 
in  Spain  in  February,  191 9.  This  step  was  followed  by  the 
abandonment  of  the  support  of  francs  by  Great  Britain  in  London, 
on  March  18,  1919.  The  violent  fluctuations  indicated  similarly 
an  abandonment  of  sterling  in  New  York.    On  March  20,  19 19, 

*'  Commerce  Reports,  April  19,  1919  and  Argentine  correspondence  of 
the  London  Economist,  Oct.  11,  1919. 

**  Annual  Report  of  the  Secretary  of  the  Treasury  for  1918,  p.  38. 


PRINCIPLES   AND   PRACTICE   IN   THE    WORLD   WAR  397 

Mr.  J.  P.  Morgan  announced  "we  have  received  instructions  from 
the  British  government  to  suspend  purchases  of  sterling  exchange 
for  government  account."  On  March  21,  1919,  the  support  of 
lire  in  New  York  was  modified  and  shortly  thereafter  abandoned. 
Mr.  Fred  I.  Kent,  Director  of  the  Division  of  Foreign  Exchange 
of  the  Federal  Reserve  Board,  announced  that  "all  restrictions  as 
to  the  sale  or  purchase  of  lire  exchange  by  dealers  are  hereby 
removed."  The  Italian  Institute  of  Foreign  Exchange,  organized 
at  the  time  when  control  of  the  quotation  of  the  lira  was  under- 
taken, still  continued  to  operate  and  for  a  few  days  there  were 
two  conflicting  quotations  in  the  market,  an  official  quotation  of 
the  institute  and  a  quotation  of  the  free  market. 

The  advances  of  the  United  States  government  were  not 
officially  part  of  the  mechanism  for  stabilizing  exchange  and  they 
continued  for  about  a  year.  The  Secretary  of  the  Treasury 
announced  that  after  March  10,  1920,  no  further  credits  would  be 
opened  by  the  United  States  government  in  favor  of  the  Allies. 
Between  March,  1919,  and  March,  1920,  the  United  States 
government  established  new  credits  amounting  to  about  $100 
million. 

it  Reasons  for  Release  of  the  "Peg" 

a.  Inability  to  Obtain  Credit — 

The  immediate  reason  for  the  release  of  the  "peg"  was  the 
inability  of  the  European  nations  to  obtain  further  credit.  The 
Bank  of  France  ceased  to  sell  sterling  exchange  at  fixed  prices 
because  of  the  exhaustion  of  its  credit  in  Great  Britain.  The 
British  government  withdrew  the  credits  which  it  had  advanced  to 
the  French  government  and  which  the  French  Treasury  turned 
over  to  the  Bank  of  France  for  the  use  of  French  importers. 

After  the  armistice,  the  United  States  government  advances 
were  further  extended  only  for  the  purpose  of  liquidating  war  con- 
tracts, and  for  the  sale  of  wheat,  the  price  of  which  was  guaranteed 
by  the  government,  and  for  purposes  of  relief. 

b.  The  Need  for  Return  to  Normal  Conditions — 

Except  for  the  support  of  lire  exchange  in  New  York  by  the 
United  States,  the  stabilization  of  exchange  was  Britain's  burden 
chiefly. 

Great  Britain  advanced  credits  to  the  other  Allies  to  support 


398        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

their  exchanges  in  London.  Likewise  it  was  Great  Britain  that 
raised  loans  and  floated  treasury  bills  in  New  York  for  the  purpose 
of  stabilizing  sterling  and  indirectly  the  other  Allied  currencies. 
Furthermore,  the  control  of  the  exchanges  was  interrelated  with 
the  control  of  exports  and  imports.  Upon  the  release  of  the  control 
of  trade  movements,  it  was  more  difficult  if  not  impossible  to  con- 
tinue to  stablize  the  exchanges  which  were  dependent  upon  them. 
Great  Britain  did  not  wish  further  to  support  the  Allied  exchanges 
in  view  of  the  large  imports  of  luxuries  and  non-essentials.  Con- 
tinued support  would  have  meant  a  cost-of-living  subsidy  to  the 
continental  Allies  at  the  expense  of  the  British  Treasury.  Again 
the  large  speculative  operations  became  more  difficult  to  control 
after  the  war,  and  upon  the  decontrol  of  exports  and  imports, 
speculation  intensified  the  fluctuations  of  the  exchanges. 

One  of  the  amusing  aspects  of  the  release  of  the  "peg"  was  the 
conflict  of  reasons  offered  by  the  press.  One  explanation  was  that 
the  release  of  the  "peg"  was  due  to  a  new  commercial  policy  adopted 
by  France,  v/hereby  depreciation  of  the  franc  would  check  imports 
into  France  and  stimulate  exports.  A  few  days  later  the  financial 
editor  of  the  Journal  de  Debats  stated,  "If  the  British  government 
will  not  grant  France  direct  advances,  France  will  be  obliged  to 
purchase  elsewhere,  in  countries  which  are  prepared  to  open  credits 
in  our  favor."  A  year  and  nine  months  later,  December  22,  1920, 
the  French  press  chided  the  United  States  for  failure  to  extend 
further  credit,  thus  causing  stagnation  in  Europe. 

iii.    The  Effects  of  the  Release  of  the  "Peg" 

As  a  result  of  the  release  of  the  "peg"  exchange  rates  again 
became  accurate  financial  indicators.  They  registered  truly  and  for 
each  country  alone  the  effect  of  adverse  trade  balances,  of  the 
decline  in  the  invisible  credits,  of  the  existence  of  large  foreign  debts, 
of  the  huge  increases  in  paper  currency,  and  of  all  the  factors  which 
operated  to  depreciate  the  Allied  exchanges  in  New  York.  The 
presentation  of  a  true  picture  of  the  unsound  financial  condition 
of  Europe  was  the  first  step  toward  a  restoration  of  normal  con- 
ditions. Inequalities  in  exchange  indicated  not  only  the  balances 
both  visible  and  invisible  between  countries  but  also  differences  in 
their  financial  condition.  The  varying  proportions  of  taxes  to 
loans  in  financing  the  war,  the  resort  to  unsecured  note  issues  of 


PRINCIPLES   AND  PRACTICE   IN  THE   WORLD  WAR 


399 


the  government  or  of  the  central  bank  of  issue,  the  measures  taken  to 
balance  the  budget  and  to  deflate  the  currency,  all  were  reflected  in 
the  rate  of  exchange.  Some  months  after  the  release  of  the  "peg" 
interest  rates  were  raised  in  Great  Britain.  Only  the  desire  to 
make  easy  the  transition  from  war  to  peace  kept  the  Bank  of  France 
from  raising  its  discount  rate  until  April,  1920. 

a.   The  Sharp  Decline  of  the  Exchanges  in  New  York — 

One  of  the  early  manifestations  of  the  release  of  control  w^s 
the  disparity  between  rates  for  dollars  in  London  and  sterling  in 
New  York.  During  the  period  of  control  the  difference  was  neg- 
ligible. Furthermore,  upon  the  announcement  of  the  abandonment 
of  the  support  of  sterling  by  the  British  government  the  cable 
rate  which  had  been  maintained  at  $4.76^^  dropped  to  $4.70. 
Sight  drafts  fell  to  $4.67  and  the  following  day  to  $4.60.  For 
months  after  the  release  of  the  "peg"  the  newspaper  headlines 
read  daily,  "Further  Declines  in  Exchange,"  "Violent  Breaks," 
"New  Low  Levels,"  "Lowest  Level  in  the  Century."  The  ex- 
changes continued  to  decline  throughout  the  year  and  into  1920. 
Not  only  did  the  Allied  exchanges,  which  had  been  supported, 

High  Monthly  Demand  Quotations  m  New  York  sa 
(Gold  parity  =100) 


Currency 

Belligerent 

Sterling 

Francs 

Lire 

Neutral 

Swiss  francs 

Guilders 

Danish  kroner 

Swedish  kroner 

Pesetas 

Argentine  pesos .... 
Chilian  pesos 


Feb.,  1919 


Dec,  1919 


Oct.,  1920 


97.78 
94.92 
81.4s 


106 . 74 
102.61 
97.48 
105.04 
109-33 

106.19 
108.78 


81.94 
52.23 
41.97 


94 . 20* 
95  15 
74-25 
83.21 
103. II 

102. II 
105.05 


72.07 

34-97 
21.66 


83.26 
77.26 
52.43 
74-25 
75-96 

85.77 
85-11 


*November   quotation.     December  quotation  is  out  of  line  with  the 
preceding  and  following  months. 

"Federal  Reserve  Bulletin,  Nov.  1920,  pp.  1159-1160. 


400        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

decline  greatly,  but  the  neutral  exchanges  which  had  been  at  a 
premium  during  the  period  of  control  declined  below  par. 

The  same  effects  are  shown  in  the  high  and  low  quotations  for 
1919.  The  high  quotations  were  attained  in  the  period  prior  to 
the  release  of  the  "peg." 


Cable  Rates  of  Exchange  ^° 


Currency 


Parity 

High, 

Low, 

High, 

1919 

1919 

1920 

$4.8665 

U.76^ 

$3  665 

$4-075 

.1930 

.1837 

.0852 

■  0933 

.1930 

•1575 

.0736 

•  0758 

.1930 

.2092 

.1718 

.1836 

.4020 

•4287s 

•3687s 

•3025 

.2680 

.27125 

•1735 

.1920 

.2680 

•2935 

.2065 

.2230 

.2680 

.2825 

•iQSo 

■2055 

Low, 
1920 


Belligerent 

Sterling 

Francs 

Lires 

Neutral 

Swiss  francs 

Guilders 

Danish  kroner .  .  . 
Swedish  kroner. . . 
Norwegian  kroner 


•1975 
•  0571 
•0335 


.1508 
2935 
130S 

.1785 
I3<^S 


b.   The  Effect  on  Trade — 

The  fall  of  the  exchanges  checked  European  imports  of  non- 
essentials, for  as  the  franc  depreciated,  the  French  importer  had  to 
pay  an  increasing  price  for  the  foreign  goods.  If  the  goods  were 
dispensable  the  increasing  premium  checked  imports,  just  as  a 
domestic  rise  in  prices  checks  purchases.  However,  some  imports 
are  indispensable;  people  must  have  food  and  raw  materials  for 
clothing  and  shelter.  The  effect  of  "unpegging"  was  to  raise  the 
prices  of  essential  imports  and  thus  increase  the  cost  of  living. 
The  index  numbers  of  wholesale  prices  in  France  rose  from  May 
onward  continuously  throughout  1 9 19  and  through  a  good  part  of 
1920,  simultaneously  with  the  fall  of  the  exchanges.  The  following 
table  gives  the  monthly  high  demand  rate  for  francs  in  New  York  in 
terms  of  gold  parity  as  100  and  the  French  index  number  of  whole- 
sale prices,  using  the  19 13  average  as  100.  Of  course,  rising  import 
prices  were  not  the  sole  factor  in  causing  a  rise  in  general  prices. 
Both  rising  prices  and  falling  exchange  were  due  to  increase  in  the 
note  circulation. 


*"  New  York  Times  Annalist,  Jan.  3,  1921. 


PRINCIPLES  AND  PRACTICE  IN  THE  WORLD  WAR 


401 


The  Decune  of  Exchange  Rates  and  the  Rise  of  Wholesale 
Prices  ^^ 


Month 

Monthly  high  demand 
rates  for  francs  in 

New  York, 
Per  cent  of  parity 

French  wholesale 

index  numbers, 

1913  =  100 

1919 
January 

94-97 
94-92 
94.82 
88.13 

85 -34 
82.64 

79-79 
70.98 
66.27 
62.14 
58.60 
52.23 

48.08 
38.76 
39-17 
35-91 
41.19 

43-47 

348 
340 
337 
332 
32s 
329 
349 
347 
360 
382 
405 
423 

487 
522 
555 

584 
550 
493 

February 

March 

April 

May 

June 

Tulv 

August 

September. 

October 

November 

December 

1920 

January ,. 

February. 

April 

June 

The  rise  in  the  cost  of  living  unsettled  international  trade  and 
made  the  manufacture  of  imported  raw  materials  a  speculation  in 
exchange. 

The  fall  in  exchange  stimulated  exports.  These  Included  both 
raw  materials  and  manufactures.  When  the  decline  was  particu- 
larly rapid,  exports  boomed  and  on  a  temporary  improvement, 
exports  declined.  This  fluctuation  of  prosperity  and  depression 
was  particularly  striking  during  the  sensational  decline  and  slight 
improvement  in  German  exchange. 

The  resulting  unsettled  condition  of  business  affectea  not  only 
the  countries  whose  currencies  v.-ere  depreciated  but  also  the  non- 
European  countries.  After  Europe  had  purchased  the  minimum 
quantity  of  indispensable  goods  necessary  to  restore  her  depleted 
stocks,  the  United  States,  Argentina,  Brazil,  Chile  and  Japan  all 
suffered  from  the  stagnation  of  industry  after  the  middle  of  1920 
because  of  the  diminishing  excess  of  exports  over  imports.     The 

"  Federal  Reserve  Bulletin,  Aug.  1920,  p.  842  and  Nov.  1920,  p.  1159. 
See  also  above,  Figures  XXI  and  XXII  on  pp.  340-1. 


402         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

diminishing  imports  of  the  countries  whose  currencies  were  de- 
preciated resulted  in  a  decline  of  prices  and  a  surplus  of  goods  in 
the  great  sources  of  supply  of  raw  materials.  M.  Loucheur, 
former  Minister  of  Commerce,  addressing  the  Chamber  of  Depu- 
ties, December  22,  1920,  blamed  America  and  England  for  the 
world-wide  stagnation  of  industry.  "Forty  or  fifty  billion  francs 
of  additional  credit  in  America  and  England  would  have  stabilized 
the  credit  of  the  world.  The  hour  has  come  to  show  them  the 
error  of  their  policy  and  the  necessity  of  reopening  government 
credits.     Even  if  we  are  their  prisoners  they  cannot  abandon  us." 

(c)    The  Effect  on  the  Gold  Market — 

Upon  the  release  of  the  "peg"  the  currencies  of  the  neutral 
countries  declined  in  New  York,  and  their  demand  for  gold  in 
New  York  in  settlement  of  their  excess  holdings  of  the  Allied 
exchanges  ceased.  Accordingly,  on  June  9,  1919,  the  Federal 
Reserve  Board  announced  that  control  over  the  exportation  of  gold 
would  be  terminated.  Because  of  a  lack  of  an  excess  of  exports  to 
the  United  States,  and  a  resulting  lack  of  dollar  drafts  the  neutral 
countries  of  Europe  were  unable  to  withdraw  gold  from  the  United 
States. 

There  was,  however,  a  heavy  flow  of  gold  during  the  year 
19 1 9  to  the  countries  of  South  America  and  the  Far  East,  in  the 
trade  with  which  the  United  States  had  an  excess  of  imports.  The 
case  of  Argentina  was  typical.  Upon  the  removal  of  the  embargo 
on  June  9,  1 91 9,  gold  shipments  began  and  continued  heavily 
throughout  the  rest  of  the  5'ear.  The  excess  of  commodity  imports 
from  Argentina  into  the  United  States  in  1919  was  $43,000,000. 
However,  during  that  part  of  the  calendar  year  19 19  when  gold 
was  free  to  flow,  the  excess  of  gold  exports  from  the  United  States 
to  Argentina  was  $56,000,000.  During  the  early  months  of  1920 
heavy  gold  shipments  continued.^-     During  the  fiscal  year  1920, 

"^  A  curious  factor  in  the  exportation  of  gold  to  Argentina  was  the 
refusal  of  American  bankers  to  renew  the  50  million  6  per  cent  5-year 
treasury  notes,  which  matured  May  15,  1920.  The  outflow  of  gold  could 
have  been  checked  by  collecting  this  loan  on  maturitv'  or  else  by  borrow- 
ing in  Argentina.  The  Argentine  government  would  not  let  the  American 
bankers  settle  for  their  excess  of  imports  with  the  maturing  treasury 
notes  because  of  the  difficulty-  of  that  government  in  re-financing  internally. 
Strange  to  say  British  bankers  undertook  to  refund  the  loan  and  obtained 
$50  million  of  gold  in  the  American  market  which  was  shipped  to  Ar- 
gentina on  British  account. 


PRINCIPLES   AND  PRACTICE   IN   THE   WORLD   WAR  403 

during  most  of  which  gold  flowed  freely,  about  $146  million  of 
gold  was  sent  to  Argentina. 

The  depreciation  of  the  dollar  in  Argentina  soon  corrected  itself 
and  the  Argentine  excess  of  exports  to  the  United  States  began  to 
decline  in  June,  1920,  and  by  August  there  was  an  excess  of 
imports  from  the  United  States.  As  a  result  the  gold  flow  was 
reversed.  In  accordance  with  the  credit  agreement,  mentioned 
above,  the  Federal  Reserve  Bank  of  New  York  had  received  gold 
and  credited  it  to  Argentina.  The  maximum  amount  was  $72,- 
500,ocx).  Toward  the  end  of  May,  1920,  the  Argentine  govern- 
ment released  in  New  York  $4,500,000  in  favor  of  American 
exporters  and  continued  to  release  gold  in  large  quantities  until 
July  10,  1920,  when  only  $28,420,000  remained  on  credit  to  the 
Argentina  government.  Dollars  rose  to  a  premium  in  Argentina 
and  on  July  24,  1920,  the  Minister  of  Finance  of  Argentina 
ordered  the  Banco  de  la  Nacion  temporarily  to  cease  accepting 
deposits  of  gold  which  called  for  equal  withdrawals  in  the  United 
States.  As  the  embargo  was  declared  pesos  declined  to  a  discount 
cf  10  per  cent.  On  October  11,  1920,  the  gold  holdings  in  the 
United  States  to  the  credit  of  the  Argentina  government  were 
exhausted  and  peso  exchange  declined  further  to  a  discount  of 
223>2  per  cent  and  on  November  15,  1920,  to  a  discount  of  28 
per  cent. 

Heavy  gold  shipments  from  all  countries  to  the  United  States 
were  resumed  after  the  release  of  the  "peg."  ^^ 

(d)    The  Continued  Liquidation  of  Securities — 

Upon  the  release  of  the  "peg"  the  flow  of  securities  was  again 
resumed.  Again,  the  flow  of  securities  acted  as  a  corrective.  The 
resale  of  the  European  holdings  of  American  securities  began  again 
in  large  volume.  Furthermore  during  this  period  American  pur- 
chases of  foreign  internal  securities,  both  government  and  indus- 
trials, ran  to  high  levels.  The  decline  of  exchange  also  resulted  in 
the  accumulation  of  large  balances  of  European  exchange  and 
currencies  upon  the  part  of  American  investors  which  they  were 
ready  to  sell  upon  a  rise  and  which  thus  tended  to  check  any  im- 
provement in  the  exchanges.  The  European  countries  both  Allied 
and   neutral,   whose   currencies  were   depreciated   in   New  York, 

"Commerce  Reports,  Nov.  19,  1920,  p.  787. 


404        INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 

borrowed  heavily  in  the  New  Yorlc  market.  As  a  result  of  the 
decline  of  the  European  exchanges  after  the  release  of  the  "peg" 
Europeans  were  less  inclined  to  purchase  American  securities  for 
purposes  of  evading  their  home  income  tax.  The  decontrol  of 
the  exchange  had  a  sobering  influence  on  the  finances  of  Europe. 
The  ways  and  means  advances  in  Great  Britain  were  subsequently 
brought  under  control  and  the  notes  of  the  Bank  of  France  ceased 
to  increase.  They  reached  their  maximum  amount  In  1920.  The 
effect  of  the  decline  in  exchanges,  resulting  from  the  release  of  the 
"peg,"  was  to  check  further  inflation  and  unsound  methods  of 
post-war  finance. 


CHAPTER  X 

BRITISH  FOREIGN  EXCHANGE 

A.  Causes  of  Depreciation 

f.  The  Nature  of  the  Fluctuations — The  pound  sterling  rose 
on  the  exchanges  of  France  and  Italy.  In  the  United  States  it 
declined,  was  stabilized  during  the  War,  and  declined  further  after 
the  release  of  the  "peg."  On  both  the  Argentine  and  Japanese 
markets  it  depreciated  after  1915.  In  the  neutral  countries, 
Switzerland,  Holland,  and  Sweden,  the  pound  sterling  at  first 
declined  greatly  but  was  supported  somewhat  as  the  result  of  the 
"peg"  of  sterling  in  New  York;  it  rose  after  the  release  of  the 
"peg"  of  francs  and  lire  in  London.  On  the  exchanges  in  China 
and  India  the  pound  sterling  declined,  first  on  account  of  the 
increased  excess  of  British  imports  and  then  owing  to  the  violent 
rise  in  the  price  of  silver. 

Extent  of  the  Decline  of  the  Pound  Sterling  on  the 

Important  Exchanges^ 

(as  of  July  each  year) 


France 

Italy 

U.S. 

Argen- 
tina 

Japan 

Switzer- 
land 
demand 
rate, 
francs 
per  £ 

Holland 

Sweden 

China 

India 
cable 
rate, 

demand 

demand 

demand 

demand 

cables 

demand 

demand 

cable 

Year 

rate, 

rate, 

rate, 

rate, 

rate, 

rate. 

rate, 

rate. 

francs 

lire 

dollars 

pence 

per  yen 

guilders 

kroner 

per  tael 

per 
rupee, 
s.     d. 

per  £ 

per  £ 

per£ 

per  peso. 

s.    d. 

per  £ 

per  £ 

s.     d. 

1913 

25.25 

25-97 

4.868 

48.2 

2    0.4 

25.30 

12.13 

18.25 

2    8 

I  3.9 

1914 

25.15 

25.265 

4 

876 

47 

7 

2    0.4 

25.20 

12.12 

18.26 

2    6.2 

1  4.0 

1915 

27.25 

29-55 

4 

762 

48 

4 

2    0.6 

26.05 

12.00 

18.25 

2    3.1 

I  3.8 

1916 

28.14s 

30.40 

4 

757 

48 

9 

2    2.1 

15.27 

11.50 

16.40 

2  11.4 

1  4.1 

1917 

27.40 

34.55 

4 

754 

5° 

5 

2     1.7 

22.50 

11.56 

15.60 

3    9.7 

I  4.2 

1918 

27.17 

43.50 

4 

753 

51 

7 

2     2.3 

18.95 

9-39 

13.45 

4    8.2 

I  6.0 

1919 

29.75 

36.70 

4.572 

5I.I 

2     2.4 

25.00 

11.84 

18.00 

5     3.0 

1  8.0 

ii     Merchandise  Balance  of  Trade — 

The  basic  cause  of  the  depreciation  of  the  pound  sterling  was 
a  large  excess  of  imports.     In   191 3  the  excess  of  imports  was 

^  Memorandum  of  Consul  General  HolHs,  London,  Commerce  Reports, 
September  27,  1919. 

40s 


406       INTERNATIONAL   FINANCE   AND   ITS    REORGANIZATION 

£243  million,  and  in  19 18  £822  million.  The  total  imports,  the 
exports  of  domestic  produce,  and  the  ratio  of  exports  to  imports 
for  the  years  19 13  through  191 8  are  shown  herewith: 

Total  Imports  and  Exports  of  Domestic  Produce  * 
(in  million  pounds  sterling) 


Calendar 

Total 

Exports  of 

Ratio  exports  to 
imports, 
Per  cent 

year 

imports 

domestic  produce 

1913 

768.7 

525-2 

68.3 

1914 

696.6 

430-7 

61.8 

1915 

851.0 

384-9 

45-2 

1916 

948.5 

506.3 

52.8 

1917 

1066.7 

525-3 

49-3 

1918 

1320.7 

498-3 

37-8 

From  1913  to  191 8  the  ratio  of  exports  to  imports  was  almost 
cut  in  half  and  this  fact  explains  the  depreciation  of  sterling  ex- 
change. 

If  the  reexports  of  foreign  and  colonial  produce  be  added  to 
exports  of  domestic  produce,  the  net  excess  of  imports  shows  a 
still  larger  increase.  In  1913  the  net  excess  of  imports  was  £133.9 
million  and  for  the  year  19 18  it  was  £789.9  million.  The  actual 
excess  of  imports  and  the  relative  figures,  based  on  returns  for  19 13 
as  100,  are  given  herewith: 


Net  Excess  of  Imports  ' 


Year 

Excess  of  imports 

Relative  figures. 

(in  millions  sterling) 

1913  =  100 

1913 

133-9 

100 

1914 

170 

4 

128 

191S 

367 

9 

275 

1916 

344 

6 

257 

1917 

467 

4 

349 

1918 

783 

8 

585 

1919 

669 

3 

500 

1920 

378.8 

283 

'International  Commerce  and  Reconstruction,  p.  154. 
'  Official  returns  of  the  British  Board  of  Trade. 


BRITISH     FOREIGN     EXCHANGE  407 

The  excess  of  imports  rose  in  191 8  to  a  high  level  of  almost 
six  times  the  pre-war  figure  and  the  increase  accounts  directly  for 
the  depreciation  of  sterling. 

iii.    The  Decline  of  Invisible  Credits 

The  pre-war  investments  of  Great  Britain  were  estimated  to 
be  £4000  million  and  the  annual  income  £200  million.  Paish 
estimated  that  £1000  million  of  securities  were  liquidated,  re- 
ducing the  annual  income  by  £50  million.  Furthermore,  Great 
Britain  borrowed  £1000  million  abroad,  w^hich  created  an  annual 
invisible  debit  of  £70  million.  The  effect  of  the  war,  then  was 
to  reduce  the  pre-war  income  from  investments  from  £200  million 
to  £80  million.  As  an  offset  to  her  borrowings  abroad,  Great 
Britain  loaned  to  her  Allies  £1739  million,  the  income  from  which 
ought  to  be  about  £90  million.  However,  Great  Britain  is  the 
debtor  of  financially  strong  countries  and  is  the  creditor  of  finan- 
cially weak  ones  and  it  is  a  question  whether  the  net  annual 
income  from  investments  will  rise  much  above  £80  million  for 
some  time.  In  an  approximation  of  the  invisible  balance  after  the 
war,  the  British  Board  of  Trade  increased  the  estimate  of  income 
from  shipping  from  the  pre-war  figure  of  £130  million  to  £500 
million  as  a  tentative  estimate  and  £440  million  as  a  final  estimate. 
Even  if  we  disregard  the  increased  income  from  shipping,  the  total 
British  balance  of  trade,  both  visible  and  invisible,  does  not  seem 
to  warrant  the  depreciation  of  sterling  that  prevailed  during  1920. 
The  excess  of  imports  from  19 14  to  1 91 8  amounted  to  about 
£2140.2  million  and  the  loans  to  the  Allies  and  Dominions 
amounted  to  another  £1800  million  or  a  total  of  about  £3950 
million.  The  borrowings  abroad  and  the  liquidation  of  securities 
as  noted  above  amounted  to  about  £2400  million.  The  difference, 
about  £1550  million,  represents  the  net  excess  of  debits  over  credits. 

The  invisible  credit  balance  was  increased  by  borrowings  from 
the  United  States,  which  at  the  time  had  the  same  effect  as  mer- 
chandise exports  in  creating  a  supply  of  bills  on  the  United  States. 
Conversely,  the  invisible  credit  balance  was  reduced  by  loans  to 
the  Continent  which,  at  the  time  made,  had  the  same  effect  as 
imports  into  the  country.  Both  an  importation  of  securities  and  an 
importation  of  merchandise  create  a  world  supply  of  bills  on 
London  and  tend  to  depress  sterling  exchange. 


408    -  INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 


iv.  Loans  to  the  Allies 

(a)  During  the  War — 

Up  to  March  31,  19 19,  the  loans  to  Dominions  and  Allies 
amounted  to  £1739.4  million,  distributed  as  follows: 

Loans  by  Great  Britain  * 

March  31,  1919 

(in  millions  sterling) 


Dominions . , 

Russia 

France 

Italy 

Belgium 

Servia 

Other  Allies. 

Total 


171 

0 

568 

I 

434 

5 

412 

.S 

86 

8 

18 

6 

47 

9 

1739-4 


These  loans  to  the  Allies  were  made  to  finance  the  purchase 
of  war  materials  by  them  and  thus  to  aid  in  the  stabilization  of 
their  rates  of  exchange. 

(b)   After  the  War — 

The  loans  to  the  Allies  after  the  war  included  advances  made 
to  the  debtor  Allies  for  the  purpose  of  postponing  paj'ment  of 
interest,  as  well  as  new  private  loans  floated  in  the  London  market.'' 
There  were  various  methods  whereby  Great  Britain  advanced  loans 
to  the  Continent.  In  some  cases  the  Continental  buyer  would 
deposit  his  native  currency  against  the  British  shipment  at  the  cur- 
rent exchange  rate  and  would  guarantee  to  deposit  additional 
currency  to  compensate  for  the  decline  of  his  exchange.  Again 
the  British  would  supply  raw  materials  in  trust  to  Continental 
manufacturers  and  the  property  right  would  be  guaranteed  by 
the  government.  Upon  the  sale  of  the  goods  the  British  exporter 
would  be  reimbursed.  Finally,  the  so-called  refining  trade  was  a 
barter  of  finished  goods  for  raw  materials.  The  British  exporter 
would  send  raw  materials  to  the  Continent  for  finishing  and  retain 
a  lien  on  the  goods  in  process  which  would  afford  increasing 
security.     Upon  the  completion  of  the  finished  merchandise  the 

*  Budget  speech  of  Mr.  Chamberlain. 
'London  Economist,  Sept,  6,  19 19. 


BRITISH    FOREIGN    EXCHANGE  409 

Continental  importer  would  return  to  the  British  exporter  a  por- 
tion of  the  finished  goods.^ 

Furthermore,  loans  were  raised  in  Great  Britain  to  pay  for 
imports  by  the  Continent  from  Great  Britain.  These  loans,  both 
long  and  short  term,  account  for  the  rapid  increase  of  exports  of 
Great  Britain  and  the  decrease  of  the  so-called  unfavorable  balance 
of  trade.  However,  Great  Britain  sold  on  credit,  but  bought  for 
cash  and  therefore  was  in  possession  of  a  large  volume  of  non-liquid 
commercial  bills  which  she  could  not  use  in  settlement  for  her 
own  imports.  As  a  result,  the  pound  sterling  was  tied  to  the  Con- 
tinental exchanges  and  fluctuated  in  sympathy  with  them,  in  much 
the  same  way  as  during  the  war  the  dollar  was  tied  to  the  cur- 
rency of  the  Allies  and  depreciated  with  them  on  the  neutral 
markets  of  Europe.  The  loans  by  Great  Britain  to  the  Continent, 
however,  covered  not  only  sales  on  credit  of  goods  and  services 
but  also  loans  to  the  Continent  for  other  purposes  and  the  purchase 
of  Continental  securities  or  industries. 

(c)  Sterling  Remained  the  World's  Currency — 

The  depreciation  of  sterling  was  due  to  the  fact  that  imports 
into  Europe  from  the  United  States  were  financed  by  remittances 
via  London.  Or  in  other  words,  Great  Britain  provided  dollars, 
with  which  the  Continent  settled  for  its  American  imports.  The  ty- 
ing of  sterling  and  Continental  exchanges  resulted  in  the  artificial 
depreciation  of  sterling  and  the  artificial  support  of  the  Continent. 

As  a  result  the  holdings  of  sterling  in  New  York  were  very 
large  but  the  holdings  of  the  Continental  currencies  were  relatively 
slight.  Trading  in  exchanges,  other  than  sterling,  was  efifected  via 
London.  This  situation  followed  from  the  efforts  of  Great  Britain 
to  increase  her  exports  to  the  Continent  and  thus  to  restore  the 
productivity  of  Europe. 

(d)  The  Palliative  Character  of  Loans — 

These  advances  by  Great  Britain  to  the  Continent  did  not 
permanently  remedy  the  situation ;  they  were  palliatives.    Like  the 

"British  Trade  Corporation's  Methods  in  Jugoslavia,  by  Consul  K. 
S.  Patten,  Belgrade,  Servia,  in  Commerce  Reports,  Aug.  9,  1920.  The 
Anglo-Danubian  Association,  Ltd.,  the  New  York  Herald  of  April  20, 
1920. 

Anglo-Baltic  and  Mediterranean  Bank,  Ltd.,  Journal  of  Commerce, 
Apr.    16,    1920. 


4IO        INTERKATIONAL    FINANCE    AND    ITS    REOEGANIZATION 

government  advances  during  the  war,  these  post-war  loans  con- 
cealed the  true  situation  and  in  that  respect  were  harmful.  Upon 
the  withdrawal  of  London's  support,  the  other  European  exchanges 
fell  sharplyj  Assuming  that  the  British  Board  of  Trade  figures 
for  the  invisible  balance  were  correct  and  that  the  total  debits  and 
credits,  both  visible  and  invisible,  would  balance,  London  exchange 
should  rise  if  England  ceased  to  support  the  Continent.  By  the 
same  token  the  Continental  exchanges  should  fall  if  the  temporary 
aid  extended  by  London  should  be  withdrawn. 

v.  Inflation 

The  increase  of  deposits  and  of  the  currency  contributed  to  the 
depreciation  of  the  pound  sterling.  If  issued  excessively,  paper 
money  which  cannot  be  converted  into  gold  at  par  depreciates 
abroad,  just  as  at  home.  The  increase  of  ways  and  means  advances, 
the  increase  of  public  and  private  deposits  of  the  Bank  of  England, 
and  of  private  deposits  of  the  joint-stock  banks,  created  a  redun- 
dancy of  credit.  When  prices  doubled,  the  value  of  the  excess  of 
imports  of  commodities  doubled.  On  the  other  hand  the  invisible 
credits,  such  as  income  from  investments  either  increased  not  at 
all,  or  certainly  not  in  the  same  proportion  as  the  price  of  com- 
modities. As  a  result  the  commodity  debits  and  invisible  credits 
no  longer  balanced.  A  larger  demand  for  bills  resulted  from  the 
growing  value  of  the  excess  of  imports  than  could  be  paid  for  by 
the  supply  resulting  from  the  stationary  income  from  investments. 


B.  The  Effects  of  Depreciation 

The  effects  of  depreciation  have  been  discussed  fully  in  the 
chapter  on  foreign  exchange  In  the  United  States.  To  summarize 
briefly,  the  effects  of  depreciation  were  both  commercial  and  finan- 
cial. The  depreciation  of  the  pound  sterling  in  New  York  and 
on  the  neutral  markets  increased  the  cost  of  British  imports,  par- 
ticularly imports  from  those  countries,  in  which  exchange  rates 
were  not  "pegged."    The  stabilization  of  exchange  in  New  York 

'  See  Par.  3.  Final  Report  of  the  Cunliffe  Committee,  Dec.  3,  1919. 
The  subject  was  discussed  in  the  Chas  Economic  Bulletin  for  October, 
1920,  by  B.  M.  Anderson,  Jr. 


BRITICH     FOREIGN    EXCHANGE  4" 

kept  the  cost  of  British  imports  from  rising.  After  the  war  the 
depreciation  of  the  pound  sterling  in  New  York  again  increased 
the  cost  of  imports  from  the  United  States  and  for  a  time  increased 
the  general  cost  of  living.  On  the  other  hand  the  depreciation  of 
sterling  stimulated  British  exports. 

The  financial  effect  of  depreciation  was  to  induce  selling  of 
British  holdings  of  foreign  securities,  in  those  countries  in  which 
sterling  was  depreciated.  Furthermore,  borrowing  by  Great  Britain 
was  stimulated,  particularly  in  those  countries  where  sterling  was 
at  a  discount. 


C.  Correctives  of  Depreciated  Exchange 

The  correctives  of  depreciation  included  the  flow  of  merchan- 
dise, the  movement  of  gold,  the  flow  of  capital  and  the  improve- 
ment of  fiscal  and  credit  conditions  in  Great  Britain.  During  the 
period  of  the  *'peg,"  loans  were  the  chief  means  of  correcting  the 
depreciation  of  sterling.  However,  the  "peg"  was  finally  removed 
in  March,  1919.  The  question  of  correcting  the  exchanges  received 
the  attention  of  the  leading  financiers  in  the  City.^  However, 
some  futile  proposals  were  made,  such  as  the  organization  of  an 
All-Empire  Bank,  much  resembling  the  abandoned  Federal  Reserve 
Foreign  Exchange  Bank  in  the  United  States.' 


1.  Merchandise  Shipments 

During  the  war  the  trade  correctives  were  absent.  As  a  bel- 
ligerent Great  Britain  was  not  in  a  position  to  check  imports  nor 
stimulate  exports.  After  the  war,  however,  the  self-correctives 
again  became  operative.  Imports  decreased  and  exports  increased. 
In  the  last  normal  year  before  the  war,  the  excess  of  British  imports 
was  £133.9  million,  in  1918  it  was  £783.8  million.  The  latter 
was  the  high  annual  record  of  the  war.  In  1919  the  excess  of 
imports  was  only  £669.3  million  and  in  1 920  it  had  declined  to 
£378.8  million. 

'  Commerce  Reports,  Feb.  2,  1920,  p.  541. 

'Suggestion  of  F.  C.  Goodenough,  Chairman  of  the  Barclay's  Bank. 


412         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Trade  Balance  of  Great  Britain  *" 
(in  millions  sterling) 


Year 

Imports 

Exports,  including 

foreign  and  colonial 

produce 

Excess  of  imports 

1913 
1918 
1919 
1920 

768.7 
1316.1 
1631.9 
1936.7 

634.8 

532-3 
962.6 

1557-9 

133-9 
783.8 

669.3 
378.8 

The  imports  rose  from  121.1  per  cent  of  exports  in  19 1 3,  to 
247.2  per  cent  in  1918,  and  declined  to  169.5  iri  1919  and  still 
further  to  124.6  per  cent  in  1920. 

The  self-corrective  effect  was  noticeable  particularly  in  the 
latter  half  of  1920.  In  Januarj^  1920,  the  ratio  of  imports  to 
exports  was  140  per  cent.  In  February,  it  was  157  per  cent,  in 
March,  135  per  cent,  in  May,  119  per  cent,  and  for  the  rest  of  the 
year  the  average  monthly  figure  was  about  the  same  as  in  May, 
although  in  November  the  ratio  of  imports  to  exports  had  declined 
to  109  per  cent. 

Although  improvement  was  apparent  in  the  trade  figures,  it 
was  not  reflected  in  the  exchange  rates,  because  the  exports  were 
going  to  the  financially  weak  countries  of  Europe.  For  example, 
the  value  of  the  excess  of  British  exports  to  France,  Belgium,  Italy, 
Germany  and  minor  states  was  astonishingly  large.  The  table  is 
given  herewith: 


Excess  of  British  Exports 
(in  millions  sterling) 


Country 

France 

Belgium 

Italy 

Germany 


1920 
(9  months) 


81.8 
20.7 
21.3 
14.8 


1919 


134-8 

56.3 
18.8 
22.2 


1913 


17 

I* 

9 

9* 

6 

5 

27 

S* 

*  Excess  of  British  imports. 
"  Official  returns  of  the  British  Board  of  Trade. 


BRITISH     FOREIGN     EXCHANGE 


413 


ii.  Gold  Shipments 

The  shipment  of  gold  was  an  important  corrective  of  the 
depreciation  of  sterling  during  the  war. 

(a)   Amounts — 

In  191 4  the  gold  exports  amounted  to  £30.6  million.  In  191 5 
the  amount  was  £39.2  million.  In  1916  it  was  £38.4  million. 
Upon  the  entry  of  the  United  States  into  the  war  British  exports 
of  gold  declined  very  greatly.  Figures  are  unavailable,  covering 
the  period  from  April,  19 17,  through  March,  1919,  when  the 
"peg"  was  released.  From  July  to  December,  1919,  the  exports 
of  gold  amounted  to  £14.6  million  and  during  the  year  1920,  the 
amount  was  £92.6  million.^^  Most  of  the  gold  shipped  before 
April,  1 91 7,  was  consigned  to  the  United  States  and  lesser  amounts 
to  the  neutrals  of  Europe.  During  19 19  and  1920  when  the 
figures  were  again  published,  the  exports  were  consigned  to  the 
United  States,  South  American  countries,  British  India  and  South 
Africa  and  the  Straits  Settlements. 

The  total  United  States  imports  of  gold  since  the  beginning 
of  the  war  were  largely  from  the  British  Empire,  as  is  shown  in 
the  table  following. 

United  States  Imports  of  Gold  " 
(in  million  dollars) 


Fiscal 

Total 

From 

From 

Year 

United  Kingdom 

Canada 

1914 

66.5 

2.6 

38.3 

1915 

171. 6 

2.0 

no. 8 

1916 

494.0 

118. 0 

267.5 

1917 

977.2 

46.4 

884.1 

1918 

124.4 

0.0 

103.0 

1919 

62.4 

0.0 

36. s 

1920 

150.  s 

64.4 

39-7 

(b)    The  Embargo — 

On  April  I,  19 19,  an  order  in  council  was  issued  to  prohibit 
the  exportation  of  gold,  coin  and  bullion  and  to  give  the  govern- 

"  Annual    Statement   of    Trade    of   the    United    Kingdom,    1914-1918. 
Accounts  Relating  to  Trade  and  Navigation,  1919  and  1920. 
^Monthly  Summary  of  Foreign  Commerce,  June,  1914-1920. 


414        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

ment  control  over  gold  movements.^^  A  law  to  the  same  effect 
was  passed  on  December  23,  1920.  The  reason  for  the  gold 
embargo  was  the  decontrol  of  the  exchanges  in  March,  19 19.  To 
have  permitted  gold  to  flow  freely  then  would  have  transferred 
the  world's  demand  for  gold  from  the  United  States  to  Great 
Britain,  the  great  excess  of  imports  of  which  would  have  drained 
its  gold  supply  very  quickly.  Furthermore,  the  countries  indebted 
to  Great  Britain  on  merchandise  imports  were  not  in  a  position 
to  ship  gold,  and  therefore  Great  Britain  could  not  settle  with  her 
merchandise  creditors  in  gold.  The  British  gold  policy  therefore 
was  dependent  on  the  Continental  gold  policy.^* 

However,  after  July,  1919,  new  gold  received  from  the  mines 
might  be  exported  under  license.  Mine  gold  from  South  Africa 
was  offered  in  London  to  the  highest  bidder,  and  was  taken  fre- 
quently by  those  countries  in  which  the  pound  sterling  was  at  a 
considerable  discount.  The  exports  of  gold  from  Great  Britain 
in  the  latter  half  of  191 9  came  from  this  source.  This  gold 
affected  but  little  the  settlement  of  trade  balances.  These  gold 
exports,  however,  were  only  a  very  small  fraction  of  the  British 
excess  of  merchandise  imports.  For  example  in  19 19  the  net  com- 
modity imports  to  Great  Britain  from  the  United  States  was  $1970 
million,  but  the  net  excess  of  exports  of  gold  to  the  United  States 
from  Great  Britain  was  only  $42  million.  In  1920  the  net  excess 
of  commodity  imports  from  the  United  States  to  Great  Britain 
was  $1094  million,  and  the  net  excess  of  imports  of  gold  from 
Great  Britain  was  only  $205  million.  The  excess  of  commodity 
imports  into  Great  Britain  in  1920  was  £378,800,000,  but  the 
excess  of  exports  of  gold  was  only  £43,500,000. 

South  African  gold  was  quoted  in  London  in  paper  money  at 
a  premium  over  the  gold  parity,  which  was  85s.  per  ounce.  The 
premium  represented  the  depreciation  of  the  British  note  as  truly 
as  if  gold  and  paper  circulated  side  by  side  in  domestic  trade.  For 
instance,  on  November  30,  1920,  the  demand  rate  for  sterling  in 
New  York  was  $3.48,  representing  a  depreciation  of  about  28.5 
per  cent.     The  gold  price  in  London  on  the  same  day  was  117s. 

"  For  a  discussion  of  the  order  see  the  bullion  letter  of  Samuel  Montagu 
&  Co.,  Apr.  3,  1919. 

"  No  figures  on  British  gc'd  exports  are  available  prior  to  July,  1919. 
Neither  trade  returns  nor  any  source  of  financial  information  furnished 
statistics  of  gold  exports.  The  Montagu  bullion  letter  resumed  publication 
of  gold  shipments  in  the  latter  half  of  1919. 


BRITISH     FOREIGN     EXCHANGE  415 

id.,  which  represented  a  depreciation  of  about  27.5  per  cent  from 
the  gold  parity  of  85s.  During  the  week  ending  January  15,  1921, 
there  was  a  violent  rise  of  sterling  rates  in  New  York,  and  simul- 
taneously a  precisely  proportionate  fall  in  the  price  of  gold  in 
London.  The  high  and  low  gold  quotations  for  the  year  1920 
were  127s.  4d.  and  I02s.  7d.  and  paper  money  was  at  66.7  and 
82.8  per  cent  of  parity,  respectively.  The  high  and  low  foreign 
exchange  quotations  for  the  year  1920  were  $4,012  and  $3.i95> 
or  82.8  and  65.7  per  cent  of  parity,  respectively.  If  gold  flows 
internationally,  the  depreciation  of  foreign  exchange  and  the  pre- 
mium on  gold  represent  the  discount  on  paper  money.  On  the 
other  hand,  if  gold  does  not  flow  freely,  as  in  the  case  of  Continen- 
tal Europe,  the  depreciation  of  the  exchanges  does  not  correspond 
so  closely  to  the  depreciation  of  notes. 

iii.  The  Flow  of  Capital 

The  most  important  corrective  of  depredation  of  sterling  was 
the  flow  of  capital.  British  holdings  of  American  securities  were 
sold.  European  securities  quoted  on  the  London  exchange  were 
sold  in  New  York.  Private  loans,  both  long-term  and  short-term, 
were  placed  by  Great  Britain  in  various  markets,  and  finally  United 
States  government  advances  were  negotiated. 

(a)    The  Resale  of  American  Securities — 

Before  the  United  States  entered  the  war  there  was  heavy 
liquidation  of  British  holdings  of  American  securities.  A  singular 
instance  was  the  resale  by  British  owners  of  an  entire  railroad  in 
the  United  States,  the  New  Orleans  &  Northeastern,  at  a  price  of 
$12,500,000.  Messrs.  J.  P.  Morgan  &  Company,  acting  as  agents 
for  the  Southern  Railway,  concluded  the  arrangements,  involving 
the  transfer  of  about  $6,000,000  in  bonds  and  about  $6,000,000 
in  stock.  The  proceeds  were  applied  against  the  purchase  of  British 
government  6  per  cent  exchequer  bonds  due  in  1920. 

I.  The  procedure  of  the  dollar  securities  committee 
— In  July,  19 1 5,  when  sterling  was  depreciating,  the  British 
Treasury  instructed  the  Bank  of  England  to  purchase  American 
dollar  securities  in  London  and  transmit  them  to  New  York  for 
sale.  In  January,  191 6,  the  Committee  issued  a  selected  list  of 
54  American  securities,  giving  daily  the  New  York  cable  quotation 
of  the  previous  day  as  the  purchase  price.    On  the  first  day  securi- 


4l6       INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 

ties  of  a  par  value  of  over  2  million  dollars  were  obtained.  The 
list  was  extended,  and  by  March  17,  191 6,  over  256  different 
issues  were  bought  by  the  Bank  of  England  from  private  holders. 
On  March  24,  1916,  the  Treasury  introduced  the  deposit  scheme 
under  which  securities  were  loaned  to  the  Treasury'.  But  as  the 
amounts  of  securities  deposited  seemed  small,  an  additional  income 
tax  of  2s.  in  the  pound  was  levied  to  compel  the  deposit  of  such 
securities  as  the  Treasury  was  willing  to  purchase.  On  January 
25,  191 7,  an  order  in  council  empowered  the  Treasury  to  requisi- 
tion any  securities  that  it  might  require  for  the  purpose  of  strength- 
ening the  financial  position  of  the  country,  thus  converting  the 
scheme  for  mobilizing  securities  from  a  voluntary  to  a  compulsory 
basis.  If  the  Treasury  acquired  entire  ownership,  the  value  of  the 
securities  at  the  current  market  price  was  paid.  If  the  Treasury 
desired  only  temporary  use  of  the  securities,  interest  and  dividends 
accrued  to  the  holders,  plus  an  additional  5^  per  cent  per  annum, 
calculated  on  the  nominal  amount  of  the  securities.  There  were 
stringent  conditions  attached  to  the  granting  of  permission  to 
sell  abroad  any  holdings  of  foreign  securities.  On  January  2,  1919, 
the  prohibition  on  the  sale  of  securities  abroad  without  the  permis- 
sion of  the  Dollar  Securities  Committee  was  removed.  The  pur- 
chase of  securities  was  discontinued,  except  with  regard  to  those 
subject  to  requisition  or  already  on  deposit  and  the  purchase  of 
these  was  discontinued  on  April  28,  19 19.  After  March  31,  19 19, 
the  additional  income  tax  of  2s.  in  the  pound  was  discontinued, 
and  the  return  of  securities  to  their  owners  began  on  April  i,  1919- 

2.  Amounts  mobilized  during  the  "peg^' — ^The  total 
amount  of  securities  mobilized  was  31 12  million  dollars,  of  which 
1083  million  dollars  was  purchased  and  2029  million  dollars  was 
loaned.  Of  the  total  amount  mobilized,  the  American  securities 
were  40  per  cent.  Of  the  total  aniount  deposited  on  loan  the 
American  securities  were  only  18  per  cent.  Of  the  total  amount 
purchased  for  resale,  the  American  securities  were  82  per  cent. 
The  American  securities  constituted  most  of  those  purchased  for 
resale,  because  the  New  York  market,  in  which  the  pound  sterling 
had  to  be  stabilized,  was  the  best  market  for  the  liquidation  of 
these  securities.  Most  of  the  American  securities  mobilized  were 
sold.  Of  the  1252  million  dollars  mobilized,  888  million  dollars 
were  sold  up  to  March  31,  1919,  and  a  large  part  of  the  remain- 


BRITISH    FOREIGN    EXCHANGE 


417 


ing  364  million  dollars  were  sold  by  January  i,  1921.     Of  the 

Argentine  bonds  mobilized  about  100  million  dollars  were  sold,  and 
the  amount  outstanding  on  October  30,  1 920,  was  1640  million 
dollars,  most  of  which  consisted  of  railway  securities.  For  several 
reasons  the  Indian  and  Colonial  securities  were  little  affected  by 
the  mobilization  scheme. 

Paish  estimated  that  the  total  shrinkage  in  value  of  securities 
during  the  war  including  the  period  prior  to  mobilization  amounted 
to  2260  million  dollars.  A  check  computation  from  the  report  of 
the  Commissioners  of  Inland  Revenue,  showing  the  income  received 
from  foreign  and  colonial  securities,  indicates  a  shrinkage  in  value 
of  foreign  securities  of  about  2225  million  dollars.  The  very 
close  agreement,  within  i^  per  cent,  may  be  fortuitous.  At  all 
events,  the  net  loss  in  the  value  of  British  holdings  was  probably 
near  2  billion  dollars.  Both  figures  include  the  loss  in  market 
value,  as  well  as  sales  of  securities. 

Amounts  of  Dollar  Securittes  Mobilized  on  March  31,  1919  is 
(in  million  dollars) 


Purchased 

Loaned 

Total 

Dollar  bonds 

680 
241 

197 
304 

877 

545 

Dollar  shares 

Total 

921 
33 

501 
137 

1422 
170 

Deduct  Canadian  securities  included. . . 

All  securities,  including  Dutch,  Scandina- 
vian and  sterling  bonds  and  registered 
stocks 

888* 
1083 

35 
82 

364 
2029 1 

29 
65 

18 

1252 
3112 

100 

Percentages  of  securities  purchased  and 
loaned: 
American  securities 

All  securities 

100 

Percentage  of  American  securities  to  total 
securities 

40 

•  1810  different  securities.  The  Statist  estimates  looo  million  dollars  resold  up  to  Oct 
30,  1920. 

t  The  Statist  estimates  that  the  maximum  reached  subsequent  to  the  date  of  the  report  was 
2192  million  dollars. 

"Report  of  the  Dollar  Securities  Committee,  Nov.  20,  1917,  submitted 
to  the  House  of  Commons,  No.  212,  also  London  Statist,  Oct.  30,  1920. 
A  review  of  the  Dollar  Securities  Committee  report  is  to  be  found  in 
the  London  Economist,  p.  1033,  Dec.  6,  1919,  and  abstract  of  the  report 
by  A.  M.  Sakolski  in  the  American  Economic  Review,  June,  1920,  p.  413. 


4l8        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

3.  Sales  after  the  release  of  the  "peg" — ^The  sale  of 
American  securities  by  British  holders  continued  after  the  release 
of  the  "peg."  For  a  time  the  sellers  were  required  to  provide  an 
equivalent  value  in  dollars,  but  on  November  11,  1920,  this  restric- 
tion was  removed,  probably  in  view  of  the  fact  that  the  Anglo- 
French  loan,  maturing  October  15,  1920,  had  been  successfullly 
met.  Again,  the  amount  of  deposit  securities  held  in  August,  1920, 
was  only  1337  million  dollars,  representing  in  part  collateral  for 
the  then  unexpired  Anglo-French  loan.  Many  of  these  were  sub- 
sequently liquidated.  The  sale  of  British  holdings  of  American 
securities  affected  not  only  those  issued  in  dollars,  but  also  those 
issued  in  pounds.  From  time  to  time  sterling  bonds  of  American 
railroads  were  sold  privately  at  a  price  which  took  into  account 
the  depreciation  of  the  pound.  For  example,  in  December,  1919, 
a  block  of  £20,000  of  Pennsylvania  Railroad  Closed  Consolidated 
Sterling  33^'s  was  bought  on  the  basis  of  $663  for  a  £200  bond. 
Normally,  the  holder  of  bonds  issued  in  sterling  would  retain 
them  in  the  expectation  of  an  appreciation  in  exchange.  It  is 
doubtful  whether  large  amounts  of  such  bonds  were  sold  in  the 
United  States. 

Furthermore,  sterling  bonds  of  foreign  governments  and  cities 
listed  on  the  London  Stock  Exchange  were  liquidated  in  New  York 
in  considerable  quantities  in  1920  and  1921. 

(b)  Sales  of  European  Securities — 

Another  corrective  of  depreciation  of  sterling  was  the  sale  of 
internal  bonds  of  the  United  Kingdom.  These  were  bought  and 
traded  in  extensively  in  the  United  States.  In  addition  there  were 
sold  in  New  York  several  industrial  securities  which  had  an  inter- 
national market,  such  as  the  shares  of  the  Royal  Dutch  Company, 
the  "Shell"  Transport  and  Trading  Co.,  Ltd.,  the  DeBeers  Mines, 
Ltd.,  and  the  Rand  Mines,  Ltd.  These  are  discussed  in  the  sec- 
tion on  foreign  exchange  in  the  United  States.  Although  the  total 
amounts  aggregated  a  considerable  sum,  only  a  very  small  fraction 
of  the  total  securities  outstanding  were  sold  in  New  York.  The 
control  of  the  companies  was  firmly  held  in  Europe. 

(c)  Foreign  Borrowing — 

Borrowing  abroad  was  the  chief  means  of  balancing  the  excess 
of  imports  of  Great  Britain  during  the  war,  and  thus  partly  cor- 
rected the  depreciation  of  the  pound  sterling.  Both  short-term 
loans  and  long-term  loans,  the  latter  secured  and  unsecured,  were 


BRITISH     FOREIGN     EXCHANGE 


419 


sold  in  New  York.     In  addition  the  British  government  borrowed 
of  the  United  States  government. 

I.  Restriction-  ox  the  exportation  of  capital — a.  The 
method  and  effect — Early  in  the  war,  new  issues  of  capital  were 
controlled  by  the  British  government.  The  purpose  was  primarily 
to  keep  the  supply  of  credit  at  home,  and  to  direct  it  to  purposes 
essential  for  the  war. 

The  effect  on  the  distribution  of  the  new  issues  was  striking. 
In  the  three  years  before  the  war  over  80  per  cent  of  the  total 
capital  issues  in  Great  Britain  were  for  foreign  purposes.  The 
restriction  on  the  issue  of  capital  during  the  war  resulted  in  a  great 
shortage  of  capital  for  home  uses,  and  after  the  war  a  larger  per- 
centage of  new  capital  was  retained  at  home  than  before.  In 
the  year  19 19,  about  80  per  cent  of  the  total  issue  was  retained 
for  home  purposes. 

The  reasons  are  obvious.  During  the  period  of  the  deprecia- 
tion of  the  pound  sterling,  lending  abroad  extensively  would  have 
aggravated  the  depreciation.  Furthermore,  the  pound  sterling,  if 
loaned  in  countries  in  which  it  was  at  a  discount,  would  not  yield 
as  profitably  as  an  investment  as  at  home,  and  finally  sterling 
exchange  might  be  restored  to  parity  by  an  increase  in  production 
in  Great  Britain,  for  which  purpose  increased  industrial  facilities 
were  required. 

British  Capital  Issues  Distributed  Geographically  " 


Calen- 
dar 
year 

For  Domestic  Purposes 

For  Foreign  Purposes 

Total  Issues  * 

Million 
pounds 

Per  cent 

of  total 

issues 

Million 
pounds 

Per  cent 

of  total 

issues 

Million 
pounds 

Relative 

figures 

1913  =  100 

1911 
19H 

1913 
1914 

191S 
1916 
1917 
1918 
1919 
1920 

28.3 

471 

44.6 

40.7 

8.3 

8.9 

8.8 

40.3 
187.6 
3310 

14-7 
22.7 
18.2 
20.4 
10. 0 
25.6 
33-2 
61.7 
79.0 
86.2 

164.0 

160.0 

197.5 

158.9 

74-7 

25.8 

17.6 

251 

49-9 

530 

85.3 
77-3 
81.8 
79.6 
90.0 

74-4 
66.8 

38.3 
21.0 
13.8 

192.3 

207.1 

242.1 

199.6 

83.0 

34-7 

26.4 

65.3 

237-5 

284.0 

79 
86 
100 
82 
34 
14 
II 

27 

98 

157 

•Excluding  British  government  loans. 
"London  Joint  City  and  Midland  Bank  monthly  circular,  January,  1921. 
For  detailed  analysis,  see  article.  Capital  Issues  in  1920.    Statist,  Janu- 
ary 8,  1921,  p.  50. 


420        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

b.  The  removal  of  restrictions — ^The  removal  of  the  restrictions 
on  the  exportation  of  capital  was  accomplished  in  several  stages. 
In  January,  191 9,  holders  of  Colonial  and  Indian  securities  were 
permitted  to  sell  them  abroad.  In  April,  1919,  restrictions  on  the 
issue  of  capital  for  domestic  purposes  were  removed,  and  in  August, 
1919,  the  embargo  on  the  exportation  of  capital  was  lifted. 

On  January  7,  1919,  the  British  Treasury  announced  that 
under  the  Defense  of  the  Realm  Act  of  January  24,  191 7,  Colonial 
and  Indian  securities  might  be  shipped  abroad  subject  to  the  con- 
dition that  the  proceeds  of  such  sales  or  of  maturing  securities 
collected  abroad  should  be  remitted  to  Great  Britain  and  retained 
there.  Further,  restrictions,  affecting  securities  in  which  any  enemy 
interest  was  concerned,  continued  in  force. 

In  March,  1919,  the  Chancellor  of  the  Exchequer  announced 
in  Parliament  that  all  issues  by  companies  established  in  Great 
Britain  would  no  longer  require  a  Treasury  license,  if  the  issuing 
company  certified  that  no  part  of  the  proceeds  were  to  be  applied 
for  capital  purposes  outside  the  United  Kingdom.  Issues  by 
British  companies  for  capital  purposes  abroad  were  permitted  only 
under  license.  Owing  to  the  decontrol  of  the  exchanges  in  March, 
1919,  it  was  important  to  limit  such  fluctuations  as  might  result 
from  the  exportation  of  capital. 

On  August  19,  191 9,  the  restrictions  on  the  exportation  of 
capital  and  the  importation  of  securities  were  completely  lifted  by 
the  Treasury,  except  in  the  case  of  securities  held  by  or  for  an 
enemy  during  the  war.  That  is,  British  investors  were  permitted 
to  buy  American  securities,  although  they  were  hardly  likely  to  do 
so  in  view  of  the  adverse  exchange  rates.  The  restrictions  were 
abandoned  chiefly  because  the  removal  of  the  censorship  made  their 
enforcement  impossible.  On  August  28,  1919,  the  Treasury 
announced  the  withdrawal  of  the  following  regulations:  ( I )  "41  D. 
Defense  of  the  Realm  Regulation  which  prohibited  remittances 
from  United  Kingdom  by  way  of  loan  or  for  the  purchase  abroad 
of  securities  or  property  other  than  merchandise,  or  for  the  pur- 
chase of  foreign  currency  as  an  investment  or  to  be  held  with  a 
view  to  appreciation  in  value.  (2)  Import  Regulation  (M.21), 
which  prohibited  the  importation  of  bonds,  shares,  scrip  or  other 
documents  of  title.  (3)  Defense  of  the  Realm  Regulation  30  F 
par.  4  (6),  which  prohibited  the  purchase  or  sale  of  securities 
which  had  at  any  time  since  September  30,  1 914,  been  in  physical 
possession  outside  the  United  Kingdom." 


BRITISH     FOREIGN     EXCHANGE  42 1 

2.  Long-term  loans — Before  the  United  States  entered  the 
war  the  private  loans  placed  by  Great  Britain  in  this  country 
amounted  to  $1050  million,  consisting  of  one  unsecured  loan  dated 
October  i,  1915,  due  October  i,  1920,  for  $250  million;  a  secured 
loan  for  $250  million,  dated  September  i,  1916,  and  due  September 
I,  1918;  a  second  secured  loan  of  $300  million  dated  November 
I,  191 6,  and  due  in  parts  November  i,  19 19  and  1920;  and  a 
third  secured  loan  of  $250  million  dated  February  I,  1917,  and 
due  in  parts  on  February  i,  19 18  and  191 9. 

On  November  i,  19 19  a  private  British  loan  amounting  to  $250 
million  was  placed  in  the  United  States,  the  first  after  the  close 
of  the  war.  It  consisted  of  3-year  5^  per  cent  gold  notes  due 
in  1922,  and  lo-year  5J/2  per  cent  gold  bonds  due  in  1929.  Both 
securities  were  convertible  at  the  option  of  the  holder  into  5  per 
cent  National  War  Bonds  of  the  United  Kingdom,  sterling 
exchange  being  computed  for  purposes  of  conversion  at  the  fixed 
rate  of  $4.30  to  the  pound.  As  the  rate  of  exchange  rose  above 
$4.30  the  holder  would  realize  an  increasing  profit,  and  at  exchange 
parity  the  seller  of  a  National  War  Bond  at  100  would  obtain 

$113.19. 

The  Anglo-French  loan  due  on  October  15,  1920,  was  com- 
pletely paid  off  at  maturity.  On  March  8,  1920,  Mr.  Chamberlain 
announced  that  the  British  government  was  buying  Anglo-French 
bonds  in  the  market  at  a  considerable  discount  below  par.  The 
funds  were  obtained  in  part  from  the  loan  above  referred  to  as 
well  as  from  the  further  sale  of  British  holdings  of  American 
securities. 

3.  United  States  government  advances — From  April  24, 
191 7,  when  the  United  States  government  advances  were  author- 
ized, to  November  15,  1920,  eight  months  after  the  Secretary  of 
the  Treasury  announced  that  no  further  advances  would  be  made, 
the  total  loans  in  favor  of  Great  Britain  amounted  to  $4277  million, 
of  which  $80  million  had  been  repaid.  Up  to  April  15,  1919,  and 
May  15,  1919,  interest  was  paid  by  Great  Britain  out  of  British 
funds  in  the  United  States,  or  from  further  credits  of  the  United 
States.  Interest  subsequent  to  these  two  interest  dates  and  up  to 
October  15,  1920,  and  November  15,  1920,  amounted  to  $104 
million.^^ 

"Annual  Report  Secretary  of  the  Treasury,  1920,  pp.  54  and  58. 


422        INTERNATIONAL   FINANCE   AND  ITS   REORGANIZATION 

4.  Treasury  bills  and  short-term  credits — In  addition  to 
the  various  forms  of  long-term  borrowing,  England  relied  upon 
treasury  bills  and  short-term  credits,  which  were  placed  in  those 
countries  in  which  she  made  heavy  purchases. 

a.  United  States — The  sterling  and  dollar  treasury  bills,  floated 
by  Great  Britain  in  the  United  States,  have  already  been  referred 
to  in  the  sections  on  British  public  finance  and  on  the  stabilization 
of  exchange  in  the  United  States.  (See  pp.  361  and  377.)  As 
early  as  1916  the  British  government  attempted  to  float  short- 
term  bills  in  New  York,  but  the  Federal  Reserve  Board  warned 
its  member  banks  against  "freezing"  their  funds  in  securities, 
which  though  short-term  in  name  were  either  by  contract  or 
through  force  of  circumstances  long-term  in  character.  Upon  the 
entry  of  the  United  States  into  the  war  considerations  of  prudent 
banking  were  displaced  by  military  necessity.  After  August  I, 
1917,  the  British  Treasury  successfully  issued  dollar  treasury  bills 
in  New  York.  The  rate  of  interest  varied  from  5  to  6  per  cent 
and  the  amount  outstanding  reached  a  maximum  of  about  lOO 
million  dollars  in  1919.^^  The  continually  maturing  treasury  bills 
proved  to  be  a  depressing  influence  on  the  exchange  rate  and  there- 
fore the  British  government  continually  reduced  the  amount  out- 
standing by  means  of  gold  shipments  and  the  further  sale  in  the 
United  States  of  the  mobilized  dollar  securities.  On  November 
8,  1920,  the  amount  of  British  government  dollar  treasury  bills 
outstanding  in  the  United  States  was  officially  reported  by  Consul 
General  Skinner  as  $31,540,000.  "On  December  20,  1920,  there 
were  outstanding  $18,220,000"  and  they  were  being  further 
reduced  according  to  J.  P.  Morgan  &  Company.  In  addition, 
twelve  months'  sterling  bills,  payable  at  option  of  the  holder  in 
dollars  at  $4,765,  were  outstanding  in  amounts  of  $28,590,000  on 
November  17,  1920.    The  amount  had  been  much  larger.^**  The 


"  Consul  General  Skinner  of  London  reported  the  maximum  official 
figures  of  British  dollar  treasury  bills  in  the  United  States  as  $98,005,000 
on  September  30,  1919.  See  Commerce  Reports,  Dec.  22,  1920,  p.  1253. 
According  to  J.  P.  Morgan  &  Company,  "British  government  90-day 
treasury  bills  were  increased  to  a  maximum  of  $91,055,000  on  March 
20,  1919.  And  from  Aug.  i,  1917  to  Nov.  11,  1918  the  maximum  outstand- 
ing was  $84,405,000."  See  also  London  cable  to  Journal  of  Commerce, 
Nov.  12,  1920,  giving  National  Debt  Office  figures  of  amounts  of  treasury 
bills  outstanding  in  the   United  States. 

"a  House  of  Commons  Debates,  November  18,  1920. 


BRITISH     FOREIGN     EXCHANGE  423 

total  amount  of  sterling  exchange  bought  in  New  York  by  J.  P. 
Morgan  &  Company  for  the  account  of  the  British  government  dur- 
ing the  period  of  the  "peg,"  from  early  1917  to  March,  1919  was 
close  to  $4,OCX)  million.  On  several  occasions  the  amounts  pur- 
chased were  as  high  as  $20  million  per  day. 

b.  Japan — In  July,  1916,  Japan  supplied  the  British  govern- 
ment with  credits  in  the  United  States,  amounting  to  $50  million, 
in  exchange  for  one-year  yen  treasury  bills  issued  in  Japan  and 
renewed  in  July,  1917.  In  December,  19 16,  a  British  loan,  amount- 
ing to  100  million  yen,  was  issued  in  Japan  in  order  to  provide 
the  British  Treasury  with  an  equivalent  dollar  credit  in  the  United 
States.  In  January,  19 18,  the  British  government  received  from 
Japan  an  additional  dollar  credit  in  the  United  States  for  $50 
million,  in  return  for  which  the  British  government  gave  Japan 
one-year  British  treasury  bills  amounting  to  80  million  yen  and  a 
credit  in  India  of  30  million  rupees.  The  reason  for  this  twofold 
transaction  was  that  Japan  had  dollars  in  America  which  Britain 
needed,  to  maintain  exchange  between  New  York  and  London, 
and  instead  of  making  the  proceeds  available  in  London  the 
Japanese  government  provided  the  British  government  with  40 
million  dollars  in  New  York.  Then  as  Japan  needed  rupees  in 
India  to  pay  for  an  excess  of  imports,  Great  Britain  opened  a  rupee 
credit  in  India  in  favor  of  Japan  in  return  for  which  Japan  gave 
the  British  Treasury  additional  credit  of  $10  million  in  New 
York." 

On  February  i,  1919,  Great  Britain  refunded  the  $40  million 
of  British  one-year  treasury  bills  in  Japan.  The  rate  was  raised 
from  53^  to  6  per  cent. 

c.  Neutral  Europe — Owing  to  the  proximity  of  the  neutrals 
of  Europe  to  Germany  and  their  dependence  upon  her  for  some 
indispensable  commodities,  the  Allied  governments  had  difficulty 
in  raising  credits  in  the  neutral  countries  for  the  purpose  of  stabiliz- 
ing exchange.^°*  After  the  armistice  a  financial  convention  between 
Spain  and  Great  Britain  was  consummated  whereby  Spain  agreed 
to  lend  Great  Britain  75  million  pesetas  at  5  per  cent.  Great 
Britain  in  return  agreed  to  permit  the  free  importation  of  Spanish 


"London  Economist,  Jan.  26,  1918. 

'•*  See  Hearings  before  the  Committee  on  Banking  and  Currency  on 
S.  3928,  "A  Bill  to  Establish  a  Federal  Reserve  Foreign  Bank,"  op.  cit. 


424        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

oranges  and  the  exportation  to  Spain  of  a  minimum  quantity  of 
150,000  tons  of  coal  per  month.  The  payment  for  coal  was  to 
be  in  sterling  at  25.18  pesetas,  or  parity.^" 

A  credit  in  Holland  for  75  million  florins  was  opened  in  favor 
of  Great  Britain,  but  only  50  million  florins  were  taken  up.-^ 

d.  Argentina — In  January,  1 91 8,  a  grain  convention  was  con- 
cluded between  Argentina  and  both  Great  Britain  and  France. 
The  governments  of  Great  Britain  and  France  agreed  to  buy  in 
Argentina  the  surplus  of  wheat  and  other  cereals  up  to  2,500,000 
tons,  to  be  exported  before  November  i,  191 8.  The  Argentine 
government  on  its  part  agreed  to  open  a  credit  in  favor  of  Great 
Britain  and  France  up  to  $100  million.^-  Against  these  advances 
the  Allied  governments  agreed  to  deposit  notes  for  two  years,  bear- 
ing 5  per  cent  interest  annually.  The  financing  of  the  wheat 
exports  from  Argentina  was  done  by  the  Banco  de  la  Nacion. 
However,  the  Caja  de  Conversion  was  authorized  to  issue  notes 
against  its  gold  holdings  if  the  Banco  de  la  Nacion  exhausted  its 
resources. 

The  loan  was  not  paid  at  maturity  and  was  extended.  In  part 
liquidation  of  this  loan,  Great  Britain  took  over  the  $50  million 
loan  of  Argentina,  due  in  the  United  States  on  May  15,  1920, 
and  agreed  to  meet  in  London  the  charges  on  the  Argentine  foreign 
debt.  At  the  same  time  the  Argentine  government  was  to  pay 
the  equivalent  sum,  at  a  fixed  rate  of  exchange,  to  the  Banco  de 
la  Nacion  to  reduce  the  British  foreign  debt.-^ 

After  the  war.  Great  Britain,  France  and  Italy  negotiated  for 
a  loan  in  Argentina  for  200  million  gold  pesos  ($I93  million)  for 
the  purchase  of  grain  in  Argentina.  This  was  similar  to  the  con- 
vention just  cited,  except  that  slightly  different  exchange  rates 
were  fixed.  The  credits  w^ere  distributed  as  follows:  80  million 
pesos  to  Great  Britain,  a  similar  amount  to  France,  and  40  million 
pesos  to  Italy.  The  period  of  the  loan  was  to  be  two  years  and 
the  rate  5  per  cent.  The  proceeds  were  to  be  applied  to  the  pur- 
chase of  Argentina  produce  exclusively.  The  Banco  de  la  Nacion 
was  authorized  to  open  a  credit  in  favor  of  the  government  for 


='  Cable  from  Ambassador  Wlllard,  in  Commerce  Reports,  Apr.  i,  1919. 
"Amsterdam  correspondence,  London  Economist,  June  19,  1920. 
^Commerce  Reports,  Feb.  9,  1919. 

*'From   Tornquist,   "Business   Conditions   in   Argentina"   reports   Nos. 
14.8  and  149  of  May  31,  and  October  31,  1920. 


BRITISH     FOREIGN     EXCHANGE  42$ 

20O  million  pesos,  and  the  Bank  in  turn  was  authorized  to  apply 
to  the  Caja  de  Conversion  for  currency  notes  up  to  the  amounts 
of  the  credits  used  by  the  three  European  governments.  As  the 
credits  were  paid  off,  the  Bank  was  to  return  to  the  Caja  for  can- 
cellation the  notes  issued  under  the  credit.  The  Senate  refused 
to  ratify  the  convention  because  of  the  fear  of  the  drain  on  the 
Caja  de  Conversion,  and  the  desire  to  give  Germany  a  similar 
advantage.  The  treaty  as  revised  by  Argentina  was  unsatisfactory 
to  the  Allies.^* 

5.  Preferential  discount  rate — Before  the  war  the  central 
banks  of  Europe  were  able  to  attract  funds  from  foreign  countries 
by  raising  the  discount  rates,  thus  creating  a  supply  of  bills.  On 
November  15,  191 5,  the  Bank  of  England  initiated  a  preferential 
rate  of  45^  per  cent  on  deposits  by  joint-stock  banks,  of  money 
representing  foreign  balances  on  deposit  with  them.  On  these 
foreign  balances  the  joint-stock  banks  had  been  paying  a  premium 
of  I  per  cent  and  more  over  domestic  balances.  The  Bank  of 
England  had  been  paying  more  on  joint-stock  bank  deposits  repre- 
senting foreign  balances  than  it  was  getting  on  its  own  loans, 
many  of  which  were  made  at  3  3^  per  cent.  As  in  pre-war  times, 
the  aim  was  to  attract  foreign  funds  to  sustain  the  rate  of  exchange. 

In  January,  1919,  the  Bank  of  England  reduced  the  rates  on 
joint-stock  balances  representing  French,  Italian  or  Belgian  funds, 
because  the  currencies  of  those  countries  were  depreciated  in  London 
and  the  attracting  of  French,  Italian  and  Belgian  funds  to  London 
tended  to  aggravate  this  depreciation.  On  August  28,  1919,  the 
Bank  of  England  announced  a  reduction  in  its  rate  of  interest  on 
all  foreign  balances  from  43^  to  3  per  cent,  and  the  joint-stock 
banks  made  corresponding  reductions.  If  American  balances  in 
London  had  been  large,  the  reduction  might  have  driven  American 
money  out  of  the  London  banks.  But  American  balances  were 
small,  and  the  ruling  had  practically  no  effect  on  them.  In  fact 
the  rate  was  reduced  in  recognition  of  the  fact  that  the  high  rate 
was  not  effective. 

When  exchange  is  upset  and  fluctuations  are  wide,  slight  dif- 
ferences in  the  annual  rate  of  interest  are  not  likely  to  attract 

*^  London  Economist,  Oct.  11,  1919,  et  seq.  The  Review  of  the  River 
Plate  gives  details  providing  for  German  participation  in  the  agricultural 
credit. 


426       INTERNATIONAL   FINANCE    AND   ITS   REORGANIZATION 

funds.  The  possibility  of  gain  or  loss  on  exchange  due  to  wide 
fluctuations  is  a  far  more  important  consideration  than  changes 
in  the  rate  of  interest  of  a  fraction  of  i  per  cent.  The  pre-war 
mechanism  of  attracting  funds  by  raising  the  interest  rate  was 
therefore  operative  only  under  conditions  of  fairly  steady  ex- 
changed^ 

iv.  Other  Correctives 

Just  as  inflation  of  the  currency,  the  inability  to  balance  the 
budget,  and  political  and  industrial  unrest  accounted  for  the  decline 
in  exchange,  so  the  improvement  of  these  factors  corrected  the 
exchanges.  That  a  definite  limit  had  been  set  on  the  fiduciary 
issue,  that  the  national  debt  of  Great  Britain  was  being  reduced 
and  the  industrial  production  gradually  increased  after  December 
31,  19 19;  all  these  factors  accounted  for  the  betterment  of  British 
exchange.  As  the  Cunliffe  Committee  stated  in  its  final  report, 
"Increased  production,  cessation  of  government  borrowing  and 
decreased  expenditure  both  by  the  government  and  by  each  in- 
dividual member  of  the  nation,  are  the  first  essentials  to  recovery. 
These  must  be  associated  with  the  restoration  of  the  pre-war 
methods  of  controlling  the  currency  and  credit  system  of  the 
country  for  the  purpose  of  reestablishing  at  an  early  date  a  free 
market  for  gold  in  London." 


D.  The  Invisible  Balance  of  Trade 

The  outlook  for  British  exchange  depended  upon  the  invisible 
factors  which  constituted  a  very  important  part  of  the  British  trade 
balance. 

i.  Foreign  Investments 

The  foreign  investments  of  Great  Britain  rose  from  the 
equivalent  of  $2750  million  in  1854  "P  ^o  about  $20,000  million 
in  1914.  The  estimates  were  made  by  Sir  Robert  Giffen,  A.  C. 
Bowley  and  F.  W.  Hirst,  from  the  income  tax  returns.  Sir 
George  Paish's  estimate  in  1910  was  based,  in  addition  on  the 
statements  of  several  thousand  British  companies. 

*"  Commercial  and  Financial  Chronicle,  July  26,  1919  and  Aug.  30,  1919. 


BRITISH     FOREIGN     EXCHANGE 

British  Foreign  Investments  ^s 
(in  millions  sterling) 


427 


Date 

Amount 

Authority 

1854 

SSO 

Bowley 

1875 

1,400 

Bowley 

1885 

1,302 

Giffen 

1885 

1,700 

Bowley 

1890 

2,000 

Bowley 

189s 

1,600 

Hirst 

1905 

2,025 

Hirst 

1909 

2,332 

Bowley 

1910 

3,192 

Paish 

1914 

4,200 

Paish 

To  obtain  the  igi^j  figures,  the  average  annual  increase  of 
foreign  investments  is  used,  which  Hobson  estimated  at  £130  mil- 
lion and  Paish  £152  million. 

Of  the  total  foreign  investments  of  about  £3,200  million  in 
1910  about  53  per  cent  was  invested  in  the  Americas,  16  per  cent 
in  Asia,  14  per  cent  in  Africa,  12  per  cent  in  Australasia  and  5 
per  cent  in  Europe.  British  investments  in  the  colonies  totaled 
£1,554  million  and  in  foreign  countries  £1,638  million.  Invest- 
ments in  the  United  States  were  estimated  at  £688  million,  in 
Argentina  £270  million,  and  in  Mexico  £87  million.  Invest- 
ments in  British  North  America  were  estimated  at  £373  million, 
and  approximately  similar  amounts  in  the  British  dominions  and 
colonies  in  Asia,  Africa  and  Australia. 


ii.  War-Time  Changes  in  Invisible  Credits 

Before  the  war,  in  spite  of  the  large  excess  of  imports  of  Great 
Britain,  the  annual  foreign  investments  of  Great  Britain  increased, 
the  pound  sterling  was  not  depreciated,  and  as  a  rule  more  gold 
was  imported  than  exported.     The  adverse  balance  of  trade  was 

"Arthur  H.  Bowley,  Annals  of  Foreign  Trade  in  the  19th  Century 
X905  Edition,  pp.  76-77,  Report  of  the  Commissioners  of  Inland  Revenue, 
quoted  by  Sir  George  Paish  in  Journal  of  Royal  Statistical  Society,  Sept., 
1909.  C.  K.  Hobson,  The  Export  of  Capital,  London,  1914,  p.  128.  The 
London  Economist,  Jan.  23,  1886,  p.  105-106.  G.  R.  Porter,  The  Progress 
of  the  Nation,  revised  by  F.  W.  Hirst,  1912  Edition,  pp.  701-702.  Journal 
of  the  Royal  Statistical  Society,  Jan.,  191 1,  pp.  177-186.  Report  of 
Federal  Trade  Commission  on  Cooperation  in  Export  Trade.  Washing- 
ton:    Government  Printing  Office,  Part  I,  pp.  66-72. 


428        INTERNATIONAL   FINANCE    AND    ITS    REORGANIZATION 

being  met  by  Invisible  exports.  In  the  annual  returns  of  foreign 
trade  of  Great  Britain  imports  are  recorded  as  c.i.f.  (including 
cost,  insurance  and  freight)  and  the  value  of  goods  exported  as  f.o.b. 
(free  on  board)  ;  the  value  of  imported  goods  include  charges  for 
insurance  and  shipping,  which  are  due  to  British  companies  chiefly, 
but  the  value  of  exports  does  not  include  similar  charges,  vi^hich  are 
due  also  chiefly  to  British  companies.  This  method  of  reporting 
increases  the  apparent  excess  of  imports,  or  reduces  the  invisible 
credit  balance.  In  addition  to  shipping  services  and  insurance, 
British  bankers  and  discount  houses  had  annual  invisible  credits 
due  them.  Again,  tourists  spent  large  sums  traveling  in  Great 
Britain. 

(a)  Investments — 

Sir  George  Paish  estimated  that  in  1914  British  foreign  invest- 
ments amounted  to  £4000  million  and  that  annual  interest  was 
£200  million.  During  the  war  £iOOO  million  of  British  holdings 
of  foreign  securities  were  sold  and  the  annual  invisible  credit  was 
reduced  by  £50  million.  Furthermore,  Great  Britain  borrowed 
abroad  £1400  million,  and  an  annual  invisible  debit  of  £70  million 
was  added.  The  net  change  therefore  was  a  deduction  of  £i20 
million  from  the  annual  invisible  credit,  leaving  an  annual  credit 
balance  of  £80  million.  The  loans  to  the  Allies  amounted  to  £1739 
million,  but  of  this  about  one-third  was  loaned  to  Russia  and  one- 
half,  or  £870  million,  had  already  been  written  off  as  a  poor  debt. 
Ultimately,  Great  Britain  expects  to  receive  on  the  remaining  £870 
million  about  £44  million  interest  annually.  For  some  time,  how- 
ever, the  interest  has  been  deferred  and  the  annual  income  from 
investments  for  1920  was  therefore  estimated  by  the  British  Board 
of  Trade  at  £ioo  million,  as  compared  with  a  pre-war  estimate 
of  £200  million. 

(b)  Shipping  Earnings — 

Shipping  earnings  do  not  represent  a  net  profit.  From  gross 
earnings  deductions  are  made  for  wages  paid  to  English  seamen, 
supplies  bought  in  England,  and  other  expenditures,  chiefly  in 
England.  However,  gross  earnings  are  credits  in  the  international 
balance  of  trade  to  the  same  extent  as  British  exports.  The  esti- 
mate of  shipping  earnings  in  1903  was  £90  million,  according  to 
Sir  Robert  Giffen,  and  £100  million  in  1910,  according  to  Sir 


BRITISH    FOREIGN     EXCHANGE 


429 


George  Paish.  Sir  F.  W.  Lewis  at  the  annual  meeting  of  Furness, 
Withy  &  Co.,  a  large  shipping  company,  estimated  the  total  for 
1919  at  £350  million  to  £400  million.  The  increase  over  the 
pre-war  figures  was  due  to  the  increase  in  chartering  rates,  chiefly. 
For  1920  the  British  Board  of  Trade  estimated  that  the  shipping 
earnings  would  be  £500  million,  later  reduced  to  £340  million. 

(c)  Other  Earnings — 

For  1903  Sir  Robert  Giffen  estimated  the  earnings  of  mercan- 
tile houses,  insurance  companies  and  banks,  doing  business  abroad 
at  £25  million.  Owing  to  inflation,  income  from  these  sources 
was  estimated  by  the  British  Board  of  Trade  to  be  £40  million. 
Sales  of  old  ships  to  foreigners,  expenditures  of  tourists,  and  family 
remittances  abroad  were  estimated  to  be  £10  million  before  the 
war  and  £15  million  in  1919  and  1920.  However,  the  items  are 
omitted  from  the  calculation  below. 

(d)  Recapitulation — 

A  summary  of  pre-war  and  post-war  debits  and  credits  is  given 
herewith : 

British  Trade  Balance ^^ 
(in  millions  sterling) 


Source 

1913 

1919 

1920 

Invisible  credit,  estimated — 

Net  income  from  investments 

Net  shipping  income 

200 

130 

30 

80 

400 

40 

120 

340 

40 

Other  services      

Total 

360 
134 

520 
663 

500 
379 

Trade  debit,  actual — 
Excess  of  merchandise  imports 

Net  credit       

226 
13 

143* 

121 

Net  gold  imports 

42 

*  Net  debit. 


"British  Board  of  Trade  Journal,  Jan.  15,  and  Aug.  12,  1920,  and  Feb. 
3,  1921,  reprinted  in  Commerce  Reports,  Feb,  24,  and  Sept.  17,  1920,  and 
Mar.  16,  1921.  See  also  Edgar  Crammond  on  British  Finance  During  and 
After   the   War,   Quarterly   Review,   July,    1918.     Hartley   Withers,   The 


430         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  excess  of  impons  of  Great  Britain  declined  in  1920.  In 
1919  there  were  large  imports  both  on  account  of  balances  on  war 
contracts  and  on  account  of  restocking  empty  stores.  But  in  1920 
imports  were  limited  to  essentials.  In  19 19  the  price  of  commodi- 
ties was  about  twice  as  high  as  in  191 3.  Therefore  while  the 
value  of  imports  in  19 19  was  twice  as  great  as  in  191 3,  the 
quantity  was  only  four-fifths  as  great. 

As  prices  fall,  the  purchasing  power  of  interest  from  foreign 
investments  will  rise  and  will  balance  a  larger  quantity  of  imports 
than  under  inflated  war  prices.  As  an  ofifset,  however,  shipping 
earnings  will  probably  decline  as  wages  and  the  price  of  chandlers' 
stores  decline.  As  a  result  of  the  net  loss  of  investment  earnings 
of  £100  million  per  annum,  the  pre-war  invisible  balance  of  £360 
million  will  in  future  probably  be  £260  million.  To  balance  the 
debits  and  credits  of  international  trade  the  excess  of  commodity 
imports  will  have  to  be  reduced.  For  none  of  the  invisible  credits 
can  be  increased  as  largely  or  as  promptly  as  imports  can  be  reduced. 
Interest  on  British  foreign  investments  cannot  be  rapidly  increased, 
nor  can  shipping  earnings  after  the  war  increase,  owing  to  the 
competition  of  Japan  and  the  United  States  developed  during  the 
war. 

According  to  the  British  Board  of  Trade  figures  there  was  a 
credit  in  the  1920  British  trade  balance  of  about  £121  million,  and 
yet  the  pound  sterling  was  at  a  heavy  discount  in  New  York.  The 
explanation  may  be  that  the  British  Board  of  Trade  estimates  for 
shipping  gearings  are  too  large,  a  not  improbable  assumption,  or 
else  that  England  extended  liberal  credits  to  the  Continent  to 
stimulate  her  exports,  and  that  her  credits  were  "frozen,"  but 
she  had  to  liquidate  her  debts  to  the  United  States.  In  general 
England's  debtors,  both  on  war  loans  and  on  merchandise,  are 
the  poor  countries  of  Europe,  and  her  creditors  both  on  war  loans 
and  on  merchandise  are  the  relatively  rich  countries  of  the  Americas 
and  Asia.  As  the  Cunlifie  Committee  stated,  "The  difficulties  of 
the  foreign  exchanges'  position  are  aggravated  by  the  grant  of 
long-term  loans  and  credits  to  enable  foreign  states  or  their  nationals 
to  pay  for  exports  from  this  country.     Few  of  these  loans  and 

Business  of  Finance,  E.  P.  Dutton  &  Co.  London  Bankers'  Magazine, 
Sept.,  1919.  London  Economist,  Oct.  17,  1919.  Review  of  Barclay's 
Bank,  Feb.,  1919  and  Oct.,  1919.  C.  K.  Hobson,  The  Measurenoent  of  the 
BaUoce  of  Trade.   Economica,  London,  May,  1921,  pp.  132-147. 


BRITI^    rOREIGN     EXCHANGE  431 

credits  will  be  liquidated  at  an  early  date.  The  large  payments 
which  we  have  to  make  to  America,  North  and  South,  for  neces- 
sary imports  of  foodstuffs  and  raw  materials  from  those  countries 
make  it  essential  that  we,  in  our  turn,  should  secure  payment  in 
cash  for  as  large  a  proportion  as  possible  of  our  exports,  visible 
and  invisible.  We  therefore  recommend  that  preference  should  be 
given  to  exports  to  countries  which  are  able  to  make  payments  in 
ordinary  course  of  trade." 


CHAPTER  XI 

FRENCH  FOREIGN  EXCHANGE  ^ 

A.  Trade  Balance 

i.   Total  Investments 

Before  1850  French  foreign  investments  were  negligible  in 
amount.  In  the  fifty  years  from  1870  French  foreign  investments 
grew  to  about  fr.  40,000  million,  as  follows: 

French  Foreign  Investments  * 


Year 

Amount, 
million  francs 

Authority 

1870 
1880 
1910 
1914 

12,000 
15,000 
40,000 
40,000 

Leon  Say 
Leroy  Beaulieu 
Walter  Zollinger 
Louis  Klotz 

The  total  pre-war  investment  of  France  yielded  aq  invisible 
credit  of  about  fr.  2,000  million  per  annum,  enabling  her  to  have 
an  excess  of  imports  and  at  the  same  time  maintain  her  exchange 
at  parity. 

ii.  Classification  by  Countries 

The  distribution  of  French  investments  abroad  indicates  the 
very  striking  fact  that  Russia  was  the  principal  outlet  for  French 

^  See  also  Le  Probleme  des  Changes  chez  les  Belligerants,  Rapport 
Generale,  1919,  No.  6158.    Budget  report  of  the  Chamber  of  Deputies. 

"  C.  K.  Hobson,  The  Export  of  Capital,  pp.  139,  141,  142  and  163. 
Walter  Zollinger,  Die  Bilanz  der  Internationalen  Wert  Uebertragungen, 
p.  1912.  Hanz  Henger,  Die  Kapltalsanlage  der  Franzosen  in  Wert- 
papieren,  pp.  10,  11  and  89.  Federal  Trade  Commission  report  on  Co- 
operation in  American  Export  Trade,  vol.  i,  p.  71,  Washington:  Govern- 
ment Printing  Office,  1916. 

432 


FRENCH  FOREIGN  EXCHANGE 


433 


investments,  with  Austria-Hungary  and  Turkey  following.  An 
unofficial  estimate  of  French  holdings  on  which  interest  had  not 
been  paid  since  the  beginning  of  the  war,  follows : 


Country 

Million  francs 

Russia 

Austria-Hungary 

Turkey 

Bulgaria 

ii,ooo 

4,000 

3,000 

600 

500 

700 

Servia 

Mexico 

Total 

19,800 

About  50  per  cent  of  the  total  investments  of  France  were  either 
in  enemy  countries,  or  in  countries  aiiected  by  revolution  or  stricken 
by  war  and  therefore  unremunerative  during  the  period.  The  esti- 
mates of  French  pre-war  investments  in  Russia  vary.  Edmond 
Thery  set  the  figure  at  fr.  12,000  million.  Another  estimate,  set 
the  total  at  fr.  17,636  million,  distributed  as  follows: 


Million  francs 

State  issues  and  municipal  bonds  guaranteed  by  the  state . . . 
Industrial  shares  and  debentures 

15,268 
2,368 

Total 

17,636 

Another   estimate  put   the   total    French   holdings  of   Russian 
securities  at  fr.  19,000  million,  distributed  as  follows: 


Million  francs 


For  the  Russian  Imperial  Treasury 

Railroads  and  public  works  under  government  control 

Commercial  enterprises  in  private  hands  but  with  govern- 
ment guaranty 


7000 
9000 


3000 


An  official  estimate,  given  in  reply  to  an  interpellation  in  the 
French  Senate,  gave  the  French  holdings  of  Russian  government 
stock  as  fr.  13,897  milh'on,  and  total  holdings,  including  loans  to 
cities  and  industries,  as  fr.  25,000  million.^ 


'Journal  Officiel,  Senat  Debats,  Mar.  28,  1920. 


434        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  investments  in  Bulgaria  were  estimated  at  fr.  700  million,  * 
and  in  Turkey  at  fr.  3385  million. 

iii.  Foreign  Loans  and  Borrowings  During  the  War 

During  the  war  France  loaned  fr.  8200  million  to  her  allies. 
In  addition  she  furnished  war  materials  valued  at  fr.  6500  million.^ 
Advances  on  account  of  German  indemnity  payments  for  the  recon- 
struction of  the  devastated  areas  amounted  to  over  fr.  20,000  mil- 
lion, by  the  end  of  1920,  making  a  total  of  about  fr.  34,700  million. 

The  foreign  loans  of  France  were  offset  by  foreign  borrowings. 
The  cash  advances  by  the  United  States  government  up  to  Novem- 
ber 15,  1920,  amounted  to  $2966  million  and  the  sales  on  credit 
of  surplus  war  supplies  to  France  amounted  to  $400  million.®  The 
advances  by  Great  Britain  up  to  March  31,  1920,  amounted  to 
£568  million.^  In  addition  to  the  government  debt  France  owed 
abroad  on  a  fixed  debt,  a  floating  debt,  and  bank  credits.  The 
private  borrowings  of  France  in  the  United  States  included  the 
loans  of  Bordeaux,  LAons,  and  Marseilles  for  $45  million,  the 
loan  of  the  City  of  Paris  for  $50  million,  and  the  1920  unsecured 
loan  for  $100  mJIlion.  A  loan  for  100  million  yen  was  out- 
standing in  Japan.  The  floating  debt  included  treasury  bills  sold 
in  England,  of  which  £10  million  were  outstanding  on  January 
I,  1920,  $25.5  million  of  treasury-  bills  outstanding  in  the  United 
States,  and  30  million  yen  of  treasury  bills  outstanding  in  Japan. 
Bank  credits  totaling  the  equivalent  at  par  of  fr.  1 400  million  were 
outstanding,  in  Spain,  Switzerland,  Norway,  Sweden,  Holland, 
Argentina,  England,  and  Uruguay. 

iv.   The  Post-War  Position  of  France 

If  the  advances  on  account  of  the  German  indemnity  are 
included  among  the  war-time  loans  of  France  her  war-time  borrow- 

*  Estimate  of  Professor  Athenase  JaranofF,  University  of  Sofia,  in  the 
Bulletin  Official  du  Comite  National  d'Expansion  Economique,  quoted  by 
Trade  Commissioner  E.  G.  Mears,  Constantinople,  Commerce  Reports, 
Jan.  3,  1920. 

'Address  of  M.  Louis  Klotz,  to  Chamber  of  Deputies,  Oct  22,  1919, 
and  Nov.  7,  1919. 

"Report  of  the  Secretary  of  the  Treasun,-  for  the  year  1920,  pp.  54 
and  66. 

'  Budget  address  of  Austen  Chamberlain,  Chancellor  of  the  Exchequer, 


FRENCH     FOREIGN     EXCHANGE  435 

ings  are  fully  oflFset.  However  she  borrowed  in  foreign  currencies 
and  the  conversion  in  francs  in  spite  of  their  depreciation  was  at 
parity.  On  the  other  hand,  French  loans  to  her  allies  and  advances 
on  account  of  the  indemnity  were  in  depreciated  francs. 

The  pre-war  investments  of  France,  according  to  M.  Klotz, 
amounted  to  fr.  40,000  million.  The  total  war  borrowings  (from 
the  United  States,  Great  Britain  and  other  countries)  were  equiva- 
lent at  parity  to  fr.  33,000  million.  The  total  war  loans  (to 
Russia,  Italy  and  Belgium  and  minor  allies)  amounted  to  fr.  13,- 
500  million,  leaving  a  balance  against  France  of  fr.  19,500  million, 
which  deducted  from  the  total  pre-war  investments,  leaves  a  net 
credit  of  fr.  20,500  million.  On  the  other  hand,  the  advances  for 
reconstruction  work  in  the  devasted  areas,  which  are  to  be  refunded 
out  of  the  German  indemnity  payments,  amount  to  over  fr.  20,000 
million.  But  France  is  indebted  to  financially  strong  countries  and 
is  the  creditor  of  financially  weak  ones.  To  consider  her  debits  and 
credits  as  equally  good  risks  is  unjustified.  The  extent  of  the 
invisible  balance  of  France  depends  upon  many  uncertain  factors, 
such  as  the  cancellation  of  the  loans  by  Great  Britain  and  the 
United  States,  the  repudiation  of  Russia's  debt  to  France,  the  ability 
of  Germany  to  pay  the  indemnity  and  the  cooperation  of  the 
debtors  of  France. 

B.  The  Causes  of  Depreciation 

The  quotation  of  the  French  franc  has  been  discussed  at  length 
in  the  section  on  foreign  exchange  in  the  United  States.  After 
the  release  of  the  "peg"  franc  exchange  declined  fairly  continuously 
until  April,  1920,  recovered  slightly  up  to  October,  1920,  and 
declined  practically  continuously  thereafter,  throughout  the  rest 
of  the  year.^ 

i.  Commercial  Causes 

The  increase  of  the  excess  of  imports  was  the  chief  cause  of 
the  depreciation  of  the  franc.  Before  the  war  the  excess  of  imports 
of  merchandise  was  about  fr.  1500  million.     This  was  more  than 

•Liesse,  Andre,  La  Hausse  des  Changes,  Economiste  Fran?ais,  Feb. 
7,  1920,  pp.  161-4.  Decamps,  Le  Credit  International  et  la  Crisc  du 
Change.  Discussions  de  la  Societe  d'  Econoraie  Politique,  Apr.  6,  1920. 
Economiste  Fran^ais,  Apr.  24,  1920. 


436        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

balanced  by  the  income  of  about  fr,  2,000  million  from  investments, 
by  earnings  of  the  French  mercantile  marine,  and  by  the  very 
substantial  expenditures  of  foreigners,  resident,  studying  or  tour- 
ing in  France.  During  the  war  all  these  three  sources  of  invisible 
credits  were  greatly  reduced.  Worse,  the  excess  of  imports 
increased  enormously,  reaching  the  high  figure  of  fr.  24,000  million 
in  1919. 

Foreign  Trade  of  France  ' 
(in  million  francs) 


Excess  of  Imports 

Imports 

Exports 

Ratio  of 

Date 

Relative 

exports  to 
imports. 

Amount 

figures, 
1913  =  100 

Per  cent 

1907 

6,222 

5.597 

625 

41 

90.1 

1913 

8,422 

6,880 

1,542 

100 

81.7 

1914 

6,402 

4,869 

1,533 

99 

76.0 

1915 

11,036 

3,937 

7,099 

460 

34-6 

1916 

20,640 

6,215 

14,425 

935 

30.1 

1917 

27,554 

6,013 

21,541 

1395 

21.9 

1918 

22,301 

4,722 

17,579 

1 140 

31.2 

1919 

3S>799 

11,879 

23,920 

1550 

33-2 

1920* 

35,40s 

22,435 

12,970 

840 

63- 3 

*  Tentative. 


ii.  Financial  Causes 

An  important  financial  factor  in  the  depreciation  of  French 
exchange  was  the  loss  of  income  from  French  capital,  invested  in 
the  enemy  countries,  Austria-Hungary,  Bulgaria,  and  Turkey,  and 
in  Bolshevik  Russia.  In  addition  loans  were  made  during  the  war, 
to  the  weak  countries  allied  with  France:  Italy,  Servia,  and 
Rumania,  and  after  the  war  France  made  large  loans  to  support 
her  military  policy  in  Poland.  On  December  29,  1920,  a  credit  of 
fr.  400  million  was  voted  by  the  Chamber  of  Deputies  for  Poland 
at  the  request  of  M.  Raiberti,  the  Minister  of  War.  On  the 
other  hand,  France  became  indebted  to  financially  strong  countries, 
the  United  States  and  Great  Britain.  At  the  time  they  were  made 
these  loans  strengthened  French  exchange,  but  upon  their  maturity 

*  Documents  Statlstlques  sur  le  Commerce  de  la  France,  1913,  1919. 


FRENCH  FOREIGN  EXCHANGE  437 

greatly  depressed  it.  The  French  foreign  debt  on  December  31, 
1 91 9,  was  fr.  33,661,  or  15.6  per  cent  of  the  total  French  debt  of 
fr.  215,399  million. 

iii.  Fiscal  and  Currency  Factors 

The  depreciation  of  the  franc  was  in  no  small  measure  due  to 
the  inflation  of  the  currency.  The  French  budget  did  not  balance 
and  the  Bank  of  France  had  to  issue  notes  to  the  state  against 
short-term  treasury  bills.  In  1 91 3  the  French  budget  was  fr.  4700 
million,  in  1920  the  budget  amounted  to  fr.  47,900  million.  True, 
the  ordinary  expenses  amounted  to  only  fr.  21,700  million,  but  the 
extraordinary  expenses  amounted  to  fr.  5400  million  and  the 
special  expenses,  "recoverable  from  Germany  under  the  Treaty  of 
Peace,"  amounted  to  fr.  20,700.  The  service  of  the  debt  in  1920 
was  nine  times  as  great  as  in  19 13.  The  ordinary  budget  was  five 
times  as  great  as  in  191 3.  These  figures  indicate  the  cause  of  the 
lack  of  confidence  in  the  French  financial  administration,  and  of 
the  depreciation  of  her  exchange.  As  a  result  of  the  increase  in 
the  budget,  and  the  inability  to  raise  adequate  revenue  by  taxation, 
the  note  issues  of  France  increased  continually  throughout  the  war. 
At  the  end  of  19 13  the  notes  outstanding  amounted  to  fr.  5714 
million,  at  the  end  of  1918,  the  amount  was  fr.  30,250  million,  and 
on  November  18,  1920,  it  was  fr.  39,256  million.  Since  the  ex- 
change rate  is  a  measure  of  the  probability  of  the  redemption  of 
paper  in  gold,  a  sevenfold  increase  in  the  volume  of  paper  money 
could  not  fail  to  cause  a  heavy  depreciation  of  French  exchange. 

C.  The  Effects  of  Depreciation 
i.  Commercial  Effects 

The  effect  of  the  depreciation  of  exchange  was  the  same  as  in 
the  other  countries  of  Europe.  Exports  were  stimulated,  and 
imports  of  non-essentials  were  checked.  The  imports  of  essential 
goods,  such  as  food  and  reconstruction  materials  rose  as  exchange 
fell,  increased  the  cost  of  living  and  the  cost  of  rehabilitation  of 
the  devasted  areas,  and  delayed  the  return  to  normal  conditions. 
Finally,  the  depreciation  of  the  franc  resulted  in  barter  and  the 
elimination  of  exchange  transactions. 

During  the  year  1920  French  exports  increased  steadily  each 


438        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

month  practically  in  the  same  ratio  as  the  rate  of  exchange  depre- 
ciated— on  the  other  hand,  imports  were  fairly  steady.  An  analysis 
of  the  imports  for  the  years  19 19  and  1920  shows  a  decline  in 
the  importation  of  foods  in  1920  and  an  increase  in  the  importation 
of  raw  materials. 

Foreign  Trade  of  France  by  ^Ionths  for  1920  ^° 
(in  million  francs) 


Month 


1913,  average 
1919,  average 
1920: 

January. .  . 

February. . 

March .... 

April 

May 

June 

August .... 
September. 
October . .  . 


Imports 


2002 
2642 
3123 


Exports 


2387 
2589 

2800 
2628 
2595 


573 
990 

722 
1324 
1338 

1377 
1210 
1809 

2399 
2152 

2333 


Ratio  of  exports 
to  imports. 
Per  cent 


81.7 
33-2 

36.1 
SO- 1 
42.8 

47.6 

SO.  7 
69.8 

8S-7 
82.0 
90.0 


In  the  first  two  months  of  1921  the  trade  balance  was  reversed  and   the 
excess  of  exports  amounted  to  fr.  185  million. 

The  corrective  effect  of  depreciated  exchange  is  shown,  though 
less  strikingly  in  a  comparison  by  years. 


Foreign  Tr.\de  of  France  " 
(in  million  francs) 

Year 

Imports 

Exports 

Ratio  exports 

to  imports. 

Per  cent 

Excess  of 
imports 

Relative 

figures, 

1913  =  100 

1913 
1918 
1919 
1920* 

8,421 
22,301 
35,799 
35,405 

6,880 

4,723 
11,879 

22,435 

81.7 
21.2 
33-2 
63-3 

1,541 
17,579 
23,920 
12,970 

ICX) 

1 140 

1550 
840 

*  Tentative. 

^Documents  Statistiques  sur  le  Commerce  de  la  France. 
"  From  official  returns. 


FRENCH  FOREIGN  EXCHANGE  439 

The  Stimulation  of  French  exports  frightened  the  Swiss  mer- 
chants, who  in  January,  1921,  petitioned  their  government  to 
restrict  the  imports  from  countries  with  depreciated  exchange. 
Owing  to  the  high  value  of  the  Swiss  franc  in  France  and  in 
other  neighboring  financially  exhausted  countries,  trade  by  means 
of  bills  of  exchange  between  France  and  Switzerland  was  checked 
and  barter  became  quite  common.  Barter  arrangements  were 
developed  between  the  chambers  of  commerce  of  Switzerland  and 
of  other  countries. 

ii.  Financial  Effects 

(a)  The  Breakdown  of  the  Latin  Monetary   Union — 

As  a  result  of  the  depreciation  of  French  exchange  the  Latin 
Monetary  Union  broke  down.  Its  silver  coins,  which  had  been 
interchangeable  in  France,  Italy  and  Belgium,  were  smuggled  into 
Switzerland  where  the  franc  had  a  higher  purchasing  power  than  in 
France.  In  spite  of  the  fact  that  Switzerland  prohibited  their 
importation,  and  that  the  other  countries  in  the  Union  prohibited 
their  exportation,  more  than  half  of  the  total  5-franc  pieces  issued 
by  all  the  members  of  the  Union  came  to  be  held  in  Switzerland. 
In  October,  1920,  French  silver  coins  of  2  francs  or  less  were 
withdrawn  from  circulation  in  Switzerland,  and  by  April,  1 92 1, 
all  French,  Belgian  and  Italian  5-franc  pieces  were  withdrawn 
from  circulation.  (The  effect  of  the  depreciation  of  the  French 
franc  on  the  Latin  Monetary  Union  was  treated  more  fully  in 
the  section  on  French  credit  and  currency.) 

(b)  The  Effect  on  Foreign  Loans  and  Borrowing — 
Repayments  on  the  credit  opened  in  Spain  in  favor  of  France 

in  1918  began  in  March,  1920,  at  the  rate  of  35  million  pesetas 
per  month.  Although  the  loan  amounted  to  420  million  pesetas, 
or  an  equal  amount  of  francs  at  gold  parity,  at  the  depreciated  ex- 
change the  repayment  required  fr.  1000  million.  At  the  time  of 
the  loan,  in  February,  igi8,  the  franc  was  equivalent  to  70  per  cent 
of  parity  in  Spain,  and  to  only  38  per  cent  in  April,  1920. 

Corresponding  to  the  increased  number  of  francs  needed  to 
repay  her  creditors  abroad,  some  of  the  debtors  of  France  need 
less  of  their  currency  to  repay  her.  France  had  a  loan  outstanding 
in  Plaiti,  amounting  to  fr.  75  million,  and  in  view  of  the  depre- 


440        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

elation  of  exchange — the  franc  was  quoted  at  about  one-third  of 
its  gold  parity — Haiti  negotiated  for  its  repayment,  in  order  to 
make  a  profit  of  almost  $io  million. ^- 

The  invisible  balance  of  France  was  upset.  Before  the  war 
the  purchasing  power  of  the  income  from  foreign  investments  was 
sufficiently  large  to  pay  for  the  French  excess  of  imports.  As  the 
franc  depreciated,  the  purchasing  power  of  the  invisible  credits 
became  grossly  inadequate.  Deflation  in  France  and  the  appre- 
ciation of  the  franc  will  hasten  the  return  of  an  equilibrium 
between  visible  and  invisible  balances. 

D.  Correctives^^* 

The  correctives  of  depreciation  were  stated  to  be  a  decrease  of 
the  excess  of  imports,  gold  shipments,  and  the  flow  of  capital.  The 
chief  corrective  of  depreciation  of  the  franc  during  the  war  con- 
sisted of  loan3  by  both  Great  Britain  and  the  United  States  to 
their  co-belligerent.  It  was  an  evidence  of  cooperation  among  the 
Allies  that  French  exchange  did  not  sink  further  during  the  war. 
In  191 7  the  Minister  of  Finance  appointed  a  committee  known  as 
the  Commission  des  Changes,  which  included  representatives  of 
the  Ministry  of  Finance,  the  Ministry  of  Trade,  and  the  Bank  of 
France,  whose  function  was  to  study  the  financial  consequences  of 
depreciated  exchange  and  to  propose  measures  to  correct  them.^' 

i.  Commercial  Correctives — 

The  self-corrective  character  of  depreciation  of  exchange  has 
been  explained  elsewhere  in  this  book.  In  addition,  the  French 
government  adopted  the  policy  of  deliberately  restricting  imports 
and  stimulating  exports.  It  issued  a  list  of  luxury  articles,  the 
importation  of  which  was  forbidden.     Goods  intended  for  reex- 

^  Washington  dispatch,  New  York  Times,  Oct.  28,  1920.  Journal  of 
Commerce,  Oct.  30,  1920. 

^^  Liesse,  Andre,  La  Question  des  Changes  Etrangers,  Remedes  Empir- 
iques  et  Rem.edes  Normaux.  Economiste  Fran^ais,  Oct.  11,  1919,  pp. 
449-51. 

"On   March  21,   1919,   an   interministerial   committee  was  created,   to 
control   exports   and   imports   and   to   investigate  cases   and  make   recom- 
mendations, when  the  embargoes  require  modification.     Journal   OfHciel, 
March  21,  1919.    Economiste  Francais,  March  29,  1919,  p.  395. 
ques  et  Reraedes  Normaux,    Economiste  Francais,  Oct.  11,  1919,  pp.  449-5X, 


FRENCH    FOREIGN     EXCHANGE 


441 


portatlon  were  exempted.^"*  The  statesmen  of  France  urged  the 
purchase  of  goods  in  countries  whose  exchange  rate  was  more 
depreciated  than  the  franc  and  the  restriction  of  purchases  in 
Great  Britain  and  the  United  States. 


ii.  Gold  Shipments 

Exports  of  gold  were  not  used  to  any  extent  to  correct  the 
exchanges.  The  1918  report  of  the  Bank  of  France  states  that 
fr.  2037  million  of  gold  was  held  abroad,  of  which  fr.  1955 
million  was  In  England  as  security  for  loans  by  the  British  Ex- 
chequer and  by  the  Bank  of  England.  This  gold  was  to  be 
returned  to  France  upon  the  repayment  of  the  loans.  France 
pursued  a  policy  of  husbanding  rather  than  using  her  gold  supplies. 
Except  during  the  year  191 5,  the  trade  returns  show  net  imports 
of  gold,  in  the  three  classes,  coin,  bullion,  and  leaf  and  mineral  gold. 

Imports  and  Exports  of  Gold  ^^ 
(in  million  francs) 


Year 

Imports 

Exports 

Net  imports 

1913 

593-4 

75-2 

518. 2 

1914 

849 

0 

72.  2 

776.8 

1915 

3« 

6 

117. 9 

79-3* 

1916 

61 

8 

2.7 

59- 1 

1917 

75 

4 

31 

72.3 

1918 

13 

8 

1.2 

12.6 

I9i9t 

152 

0.3 

14.8 

*  Six  months. 


t  Net  exports. 


Upon  the  entry  of  the  United  States  into  the  war,  the  exports 
of  gold  practically  ceased.  Up  to  that  time  gold  was  shipped  to 
the  United  States,  either  directly  or  through  Great  Britain,  in 
order   to   create   an   easy   money  market   there  and   to   facilitate 


"  Cablegram  to  State  Department  from  American  Embassy  at  Paris. 
Washington,  May  3,  1920.  See  also  Paper  No.  XI,  Exchange  Control, 
Brussels  Financial  Conference,  p.  115.  Similar  laws  were  passed  May 
6,  1916,  Mar.  22,  1917,  Jan.  20,  1919,  and  Dec.  30,  1919.  See  Journal 
Officiel. 

"Tableau  General  du  Commerce  et  de  la  Navigation,  1913-1918,  and 
monthly  returns  for  1919. 


44^ 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


borrowing  by  the  French  government.  Except  in  191 5  the  exports 
of  gold  were  more  than  offset  by  purchases  of  gold  abroad.  The 
total  increase  in  the  gold  holdings  of  the  Bank  of  France  during 
the  war  of  about  fr.  2400  million  were  obtained  from  domestic 
hoards.^® 

United  States  Ibcports  of  Gold  " 
(in  million  dollars) 


Fiscal  year 

Total  imports 

Imports  from 
France 

1914 

1915 
1916 
1917 
1918 
1919 
1920 

66.5 
171. 6 
494.0 
977.2 
124.4 

62.4 

150.5 

1.2 

II. 6 
0.0 
0.0 
0.0 
0.0 
0.7 

iii.   The  Flow  of  Capital 

(a)   Restrictions  on  the  Export  of  Capital — 

On  August  I,  191 7,  a  law  was  passed  requiring  that  a  register 
of  foreign  exchange  transactions  be  kept  by  all  persons  that  col- 
lected, bought,  sold,  negotiated  or  discounted  foreign  currency  or 
bills,  coupons,  shares  or  bonds,  the  amount  or  proceeds  of  which 
were  payable  abroad  in  foreign  money,  or  after  negotiation  abroad 
were  held  at  the  disposal  of  foreigners.  Dealers  were  obliged  to 
enter  in  the  register  the  nationality  and  domicile  of  all  persons 
transacting  any  foreign  exchange  business.  The  transactions  in- 
cluded orders  given  in  France  for  the  sale  abroad  of  francs  or  bills 
in  francs,  checks  issued  in  France  and  presented  for  payment 
after  having  been  negotiated  abroad,  checks  drawn  on  France  or 
payments  in  francs  on  foreign  orders  for  more  than  fr.   io,ooo.^* 

The  exportation  of  capital  was  prohibited  by  a  law  of  April 
3,  191 8.  Residents  of  France  were  forbidden  to  send  out  of  the 
country  for  the  purpose  of  sale  any  securities  which  would  result 
not  in  a  supply  of  francs  but  in  a  supply  of  foreign  currency,  to 
be  used  in  violation  of  the  existing  laws.    Residents  of  France  were 

"Report  of  the  Bank  of  France,   191S. 

"June  Monthly  Summary  of  Foreign  Commerce,   1914  to  1920. 

"Decree  of   Sept.  4,   1917. 


FRENCH     FOREIGN     EXCHANGE  443 

likewise  prohibited  from  subscribing  abroad  to  new  issues,  or  from 
making  loans  to  persons  outside  of  France,  or  from  purchasing  any 
securities,  property  or  goods  if  such  a  purchase  resulted  in  a 
transfer  of  funds  from  France.  The  importation  into  France 
of  all  securities  representing  an  interest  in  a  property  or  a  mortgage 
was  prohibited. 

The  Commission  des  Changes  provided  for  the  administration  of 
the  laws  concerning  foreign  exchange.^^ 

(b)  Sale  of  Securities — 

Early  in  the  war  France  liquidated  some  of  her  securities  in 
London,  such  as  the  Brazilians,  and  the  French  international 
favorites,  Rio  Tintos,  Royal  Dutch,  "Shell,"  and  de  Beers.^"  After 
the  war  the  depreciation  of  the  franc  stimulated  the  sale  in  neutral 
countries  of  French  holdings  of  foreign  securities.  A  steady  stream 
of  Swiss  securities  was  shipped  from  France  during  the  latter 
part  of  19 1 9  to  such  an  extent  as  to  disorganize  the  Swiss  stock 
market.  For  example,  prime  33^-per  cent  Swiss  railway  bonds 
on  some  days  declined  as  much  as  3  per  cent.  The  securities 
which  the  French  investors  refused  to  surrender  to  the  government 
to  mobilize  during  the  war  were  now  sold  in  great  quantities.^^ 
Yet  the  total  sale  of  French  holdings  of  foreign  securities  have 
not  been  very  large,  less  than  fr.  600  million  according  to  one 
authority.-- 

(c)  Private  Borrowing  Abroad — 

I.  Mobilization  of  securities — In  the  early  part  of  1916, 
M.  Ribot,  the  Minister  of  Finance,  requested  the  British  authorities 
to  permit  aealings  in  French  holdings  of  foreign  securities  on  the 
London  Stock  Exchange.  The  French  government  called  on  the 
French  holders  of  securities  negotiable  in  London  to  turn  them 
over  for  sale,  in  order  to  supply  the  state  with  foreign  funds,  in 
exchange  for  which  the  state  made  payment  in  treasury  bonds. 

"Paper  No.  XI,  Brussels  Financial  Conferences,  ibid.  Also  Journal 
Official,  Apr.  4,  1918.  Commerce  Reports,  Apr.  i6,  1918,  and  Apr.  29, 
1918.  London  Economist,  Feb.  15,  1919,  p.  215.  Information,  Paris,  Jan. 
I,  1920. 

^London  Economist,  Mar.  25,  1916  and  May  27,  1916. 

"  Frankfurter  Zeitung,  Dec.  lo,  1919. 

"Report  of  M.  Descamps,  head  of  the  Securities  Department  of  the 
Bank  of  France,  at  the  October  meeting  of  the  Society  Frangaia 
d'Economie  Politique,  Nov.,  1920. 


444        INTERNATIONAL    FINANCE   AND   ITS    REORGANIZATION 

The  Bank  of  France  arranged  the  transactions  and  devoted  the 
proceeds  to  the  payment  of  French  debts  in  England.  Owing  to 
the  limited  capacity  of  absorption  of  the  British  market  and  to 
other  difficulties  this  plan  was  not  very  successful,  and  arrangements 
were  devised  for  mobilizing  French  holdings  of  foreign  securities. 
Later,  in  191 6,  M.  Ribot  called  for  the  deposit  or  surrender  of 
neutral,  including  American,  securities.  These  mobilized  securities 
were  used  as  collateral  for  loans  placed  in  the  United  States. 
The  securities  listed  included  Dutch,  Swiss,  Scandinavian,  Spanish, 
Egyptian,  Argentine,  Brazilian  and  Uruguayan  securities.  The 
French  Treasury  paid  25  per  cent  in  addition  to  the  net  annual 
return  of  securities  deposited  with  it  and  in  the  event  of  their  sale, 
the  owners  were  paid  the  highest  market  quotation  during  the 
preceding  quarter.-^ 

By  the  end  of  December,  191 7,  the  Bank  of  France  reported 
that  the  total  securities  mobilized  amounted  to  fr.  640  million, 
consisting  of  over  774,000  securities. 

2.  Treasury  bills  and  credits  opened — ^The  grand  total 
foreign  debt  of  France  on  January  i,  1920,  amounted  to  fr.  62,370 
million,  counting  10.75  francs  to  the  dollar,  or  about  30,200  million 
gold  francs.  Of  the  total  foreign  floating  debt  88.1  per  cent  was 
in  treasury  bills  sold  abroad  and  11.9  per  cent  in  bank  credits. 

a.  In  Great  Britain — On  April  14,  1 91 6,  the  French  and 
British  governments  entered  into  an  agreement  to  stabilize  French 
foreign  exchange.  Under  the  terms  of  this  agreement  gold  was 
exported  by  the  Bank  of  France  to  the  Bank  of  England,  and  Great 
Britain  granted  credits,  both  unsecured  and  secured  by  gold  and 
neutral  stocks  and  bonds.  Of  the  total  French  short-term  foreign 
credits  Great  Britain  extended  the  largest  part.  The  English 
Treasury  and  the  Bank  of  England  also  held  deposits  of  French 
treasury  bills  against  which  British  credits  were  opened.  These 
two  items  combined  constituted  over  85  per  cent  of  the  total 
French  foreign  floating  debt.  After  the  release  of  the  "peg"  and 
the  elimination  of  the  support  of  the  British  Treasury  and  of  the 
Bank  of  England,  French  treasury  bills  were  sold  abroad  to  correct 
French  exchange. 

'^  Economiste  Francais,  Feb.  9,  May  13,  1916;  Journal  Officiel,  May 
5,  1916.     London  Economist,  June  10,  1916. 

Bourbeau,  Marcel,  La  Bourse  des  Valeurs  de  Paris  Pendant  la  Guerre, 
Faris,  1921.    Part  III. 


FRENCH    FOREIGN    EXCHANGE 


445 


b.  In  the  United  States — During  the  war  a  number  of  FrencK 
corporations  opened  credits  with  American  bankers  in  order  to 
finance  exports  to  France.  These  credits  were  secured  by  neutral 
bonds  as  collateral  and  ran  for  three  months  with  the  option  of 
five  renewals.  In  February,  1916,  the  munitions  works,  Schneider- 
Creusot,  placed  a  short-term  loan  of  fr.  150  million  through  a 
syndicate  of  bankers  in  the  United  States.  The  French  private 
banks  and  bankers  cooperated  in  the  task. 

FoEEiGN  Floating  Debt  of  France,  January  i,  1920 
(in  million  francs) 


Items 


Amount 


Per  cent 
of  total 


Treasury  bills: 

Deposited  in  the  English  treasury 

Deposited  in  the  Bank  of  England 

Sold  in  England 

Total  in  Great  Britain 

Sold  in  the  United  States 

Sold  in  Japan 

Total  treasury  biHs 

Bank  credits: 

Spain 

Uruguay 

Switzerland 

Argentina 

HoUand 

England 

Norway 

Sweden 

Total  foreign  bank  credits 

Total  floating  foreign  debt , 

Total  fixed  foreign  debt , 

Total  foreign  debt 

Total  domestic  and  foreign  debt 


I7,SS9 

2,654 

409 


62,370 
238,474 


73-6 

II. o 

1.7 


20,622 

86.3 

274 

158 

I.Z 

0.7 

21,054 

88.Z 

1,221 

S-i 

429 
281 
261 

1.8 
1.2 
i.r 

221 

o.g 

170 

0.7 

116 

0.6 
o-S 

2,838 

II. 9 

23,892 

100. 0 

38,478 

Before  the  United  States  entered  the  war,  French  treasury  bills 
in  francs  were  sold   in  the   New  York  market.      However,  the 


446       INTERNATIONAL   fINANCE   AND   ITS   REORGANIZATION 

warning  of  the  Federal  Reserve  Board  in  November,  1916,  checked 
the  development  of  a  market  for  them.  After  the  release  of  the 
"peg,"  French  Treasury  bills  in  dollars  were  sold  in  New  York. 
On  August  I,  191 9,  J.  P.  Morgan  &  Company  began  the  sale 
of  60-and  90-day  French  treasury  bills  along  lines  similar  to  the 
sale  of  British  dollar  treasury  bills  since  August,  191 7.  The 
limit  of  the  total  issue  was  to  be  $50  million  and  of  the  weekly 
maximum  $5  million.  The  rates  fluctuated  around  6  per  cent 
and  were  slightly  higher  than  on  British  bills. 

c.  Spain — In  June,  191 6,  French  merchants  received  a  credit 
from  Spain  of  fr.  20  million  monthly  for  six  months.  In  March, 
191 8,  France  and  Spain  entered  into  a  trade  agreement  to  permit 
the  interchange  of  products  which  were  badly  needed  in  either 
country  for  goods  which  were  in  abundant  supply  in  the  other. 
An  important  part  of  the  agreement  was  that  the  Spanish  govern- 
ment authorized  a  consortium  of  Spanish  bankers  and  merchants 
to  open  in  favor  of  a  consortium  of  French  bankers  monthly  credits 
not  to  exceed  35  million  pesetas  per  month  for  the  ten  months 
of  19 1 8,  or  a  total  of  350  million  pesetas  for  the  remainder  of  the 
year.  These  credits  were  guaranteed  by  the  deposit  with  the 
Bank  of  Spain  of  Spanish  securities  and  French  Treasury  obliga- 
tions payable  in  pesetas  in  Spain.^  The  margin  of  collateral  in 
excess  of  the  loan  was  40  per  cent.  The  bills  ran  for  90  days 
but  were  renewable  up  to  two  years. 

The  total  debt  in  Spain  in  the  early  part  of  1920  amounted  to 
455  million  pesetas,  which  were  due  beginning  March,  1920,  in 
monthly  installments  of  35  million  pesetas.  The  Spanish  govern- 
ment agreed  to  postpone  the  initial  repayment  until  March,  1921.-° 

d.  Japan — In  July,  191 7,  the  first  issue  of  French  yen  treasury 
bills,  amounting  to  50  million  yen,  were  placed  with  bankers  in 
Japan,  for  the  purpose  of  financing  Japanese  exports.  On  No- 
vember 12,  19 1 8,  the  French  government  obtained  another  banking 
credit,  amounting  to  50  million  yen  and  gave  French  yen  ex- 
chequer bonds  as  collateral.  The  bonds  matured  in  three  years, 
bore  interest  at  6  per  cent  and  were  issued  at  98.-® 

**  See  the  author's  International  Commerce  and  Reconstruction,  p.  80. 

^  L'Europe  Nouvelle,  Jan.  24,  1920.  Madrid  dispatch  to  Journal  of 
Commerce,  Dec.  10,  1920. 

^  Japan  Chronicle,  Nov.  6,  1918.  Announcement  of  Akira-Den,  the 
Japanese  Financial  Commissioner  in  New  York,  Nov.  25,  1918.  Commerce 
Reports,   Jan.  22,  1919. 


FRENCH     FOREIGN     EXCHANGE  447 

e.  In  other  countries — In  May,  1919,  Canada  granted  a  credit 
of  $25  million  to  France  and  like  sums  to  Belgium,  Greece  and 
Rumania. 

In  1918  the  Argentine  government  extended  a  credit  of  $100 
million  to  France.  (This  was  discussed  in  conjunction  with  the 
British  borrowings  in  Argentina.)  A  balance  of  $17  million  due 
in  1 92 1,  was  extended  for  another  year.  France  also  opened 
short-term  credits  in  Holland  amounting  to  30  million  florins.^^ 
Credits  were  also  obtained  by  France  in  Sweden,  Norway,  Swit- 
zerland and  Uruguay. 

3.  Long-term  borrowings — France  borrowed  on  long-term 
loans.  On  July  i,  1920,  there  were  outstanding  in  the  United 
States  $250  million  of  French  government  loans  and  $95  million 
of  loans  of  the  cities  of  Paris,  Lyons,  Marsielles  and  Bordeaux.-^ 
There  had  also  been  placed  secured  external  loans  in  the  United 
States,  amounting  to  $400  million,  which  have  been  discussed  in 
the  chapter  on  French  public  finance.  Furthermore,  the  internal 
loans  of  France  were  sold  extensively  in  the  American  market. 
In  February,  1920,  the  5  per  cent  internal  loan  then  floated  was 
extensively  sold  at  the  rate  of  $75  per  thousand  francs,  which 
corresponded  to  the  then  prevailing  rate  of  exchange.  To  facilitate 
borrowing  by  municipalities  the  French  government  authorized 
them  and  the  departments  of  France  to  borrow  abroad  for  periods 
not  exceeding  30  years,  subject  to  the  approval  of  the  national 
government  as  to  the  rate  of  interest,  the  maturity  and  the  debt 
limit.-^ 

(d)    United  States  Government  Advances — 

Upon  the  entry  of  the  United  States  into  the  war  the  financial 
difficulties  of  France  \\erc  relieved.  Abundant  credit  was  forth- 
coming. Up  to  November  15,  1920,  France  had  obtained  $2997 
million  and  had  repaid  about  $31  million.  Of  this  amount  $1,027 
million  was  extended  after  the  signing  of  the  armistice,  and  $50 
million  was  extended  after  April  10,  1920,  when  all  government 
advances,  except  on  outstanding  commitments,  ceased.  The  interest 
accrued  and  unpaid  on  advances  to  France  amounted  to  $211 
million   on   November    15,    1 920.      Credits   opened   by   the   War 

"Amsterdam   correspondence,   London   Economist,    June    19,    1920. 
^  Guaranty  Trust   Co.   statement   and   Federal   Reserve  Bulletin  July, 
1920. 

"Journal  Officiel,  Sept.  30,  1920. 


448        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Department  in  favor  of  France  for  the  purchase  of  army  supplies 
amounted  to  $400  million.  These  supplies  were  sold  at  a  profit 
to  the  French  consumer  and  enabled  the  French  government  to 
reduce  its  internal  floating  debt  and  to  help  balance  its  budget. 
The  total  debt  of  France  to  the  United  States  government  on 
November  15,  1920,  amounted  to  $3577  million. 

In  addition  to  the  advances  thus  made,  the  United  States 
government  placed  dollar  credits  by  the  American  Expeditionary 
Force  at  the  disposal  of  France  in  exchange  for  francs  needed 
in  France.  The  credits  thus  made  available  to  the  French  govern- 
ment from  the  beginning,  in  January,  19 18,  to  November  15,  1 920, 
were  $1025  million,  in  return  for  which  France  furnished  5712 
million  francs,  or  at  the  rate  of  about  5.55  francs  to  the  dollar, 
the  "pegged"  rate.^<* 

(e)    The  "Pegging"  of  Foreign  Exchange — 

French  foreign  exchange  fell  fairly  continuously  until  Sep- 
tember, 19 1 5,  when  it  declined  to  about  80  per  cent  of  parity. 
After  that  date  it  was  maintained  fairly  stable,  fluctuating  about 
2  per  cent.  The  "pegging"  of  French  exchange  was  made  possible 
by  the  support  of  Great  Britain,  which  extended  credit  liberally 
to  her  ally.  In  April,  191 7,  upon  the  entry  of  the  United  States 
into  the  war,  French  exchange  rose,  and  was  maintained  there- 
after at  about  90  per  cent  of  parity.  Arbitrage  reduced  the  discount 
on  the  franc  in  neutral  markets.  French  exchange  subsequently 
rose  and  at  the  time  of  the  release  of  the  "peg"  it  was  at  about 
95  per  cent  of  parity.  Its  subsequent  decline  down  to  about  33 
per  cent  of  parity  is  discussed  in  the  section  on  exchange  in  the 
United  States. 

The  bills  of  exchange  handled  by  the  Bank  of  France  exceeded 
fr.  6,000  million  in  191 7  and  fr.  5,000  million  in  191 8.  They  were 
chiefly  sterling  and  dollar  bills,  supplied  by  the  French  Treasury, 
to  stabilize  francs  in  London  and  New  York.  In  1919  the  bills 
supplied  by  the  Bank  of  France  were  about  fr.  2,200  million,  of 
which  almost  fr.  1,500  million  were  supplied  by  the  Bank  in  the 
first  three  months  of  the  year.  The  remaining  fr.  700  million, 
resulted  from  the  sale  of  foreign  securities  and  from  advances  by 
the  United  States  Treasury.^^ 

"Report  of  the  Secretary  of  the  Treasury  for  the  year  1920,  pp.  54-69. 
"Report  of  the  Bank   of   France   for  the  year   1919.     Also   report  of 
Consul  General  A,  M.  Thackara,  for  191 9,  ibid. 


CHAPTER  XII 
GERMAN  FOREIGN  EXCHANGE^ 

The  quotations  of  German  exchange  before,  during  and  after 
the  war  have  been  given  above.  The  period  after  the  war  may 
be  summarized.  Immediately  following  the  signing  of  the  Treaty 
of  Peace,  there  was  a  sensational  collapse  of  German  exchange. 
The  high  monthly  demand  rate  in  July,  1 9 19,  was  8.00  cents  and 
in  January,  1920,  it  was  i.Oi  cents  per  mark.  The  inflation  of 
German  currency  proceeded  at  a  far  slower  rate  than  the  decline 
of  mark  exchange.  Internal  depreciation  was  less  than  external 
depreciation.  As  a  result  prices  of  German  goods  became  very  low 
to  foreign  buyers  and  there  was  a  tremendous  wave  of  foreign 
purchasing  of  German  goods  and  securities.  The  so-called  "auction 
sale  of  Germany,  or  the  "great  German  clearance  sale"  denuded 
Germany  of  goods.  At  the  same  time  the  removal  of  the  Allied 
blockade  and  of  trade  restrictions  and  the  unguarded  customs 
frontier  in  the  west  led  to  the  excessive  importation  of  luxuries, 
which  ran  into  billions  of  marks.  During  this  period  "every 
Dutchman  or  Dane  leaving  Germany  possessed  a  Zeiss  field  glass 
or  camera  bought  for  a  few  guilders  or  crowns  and  Germans 
spent  their  last  mark  on  American  chocolate  or  cigarettes." 

The  second  period  was  characterized  by  a  foreign  demand  for 
German  goods  and  a  stimulus  to  German  industry.  Although  the 
cost  in  marks  of  imported  raw  material  was  high  the  other  items 
in  the  cost  of  production,  such  as  wages,  rent  and  overhead,  were 
paid  in  the  currency  of  low  value.  To  prevent  any  further  "clear- 
ance" sale  export  premiums  v^ere  to  be  added  to  domestic  prices. 
When  they  were  ready  to  be  put  into  effect,  exchange  improved 
and  the  so-called  "catastrophe  boom"  was  followed  by  an  "im- 
provement depression"  when  the  rising  rates  of  German  exchange 
reduced  foreign  buying. 

'  During  the  war  publication  of  quotations  of  foreign  securities  or 
currencies  was  prohibited  by  laws  of  Feb.  25  and  Mar.  7,  191 5.  See 
Reichsgesetzblatt,  1915,  pp.  iii,  112,  154.  After  the  war  complete 
quotations  were  given  for  the  war  period.  See  the  Deutscher  Reichs- 
anzeiger  or  the  Vierteljahreshefte   zur   Statistik  for   1920. 

449 


450        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

During  the  third  period  exports  declined,  industry  was  less 
active  and  unemployment  increased.  Prices  in  Germany  rose 
toward  the  world  level,  not  as  a  result  of  export  premiums,  but  as 
a  result  of  natural  economic  forces. 

The  three  periods  after  the  armistice  were  periods  of  violent 
price  changes.  In  the  first  domestic  prices  were  low  and  exchange 
was  low.  In  the  second  period  domestic  prices  were  high  and 
exchange  was  low.  In  the  third  period  domestic  prices  were  high 
and  exchange  was  high.  Although  the  cost  of  living  was  high,  in 
marks,  it  was  low  in  dollars  or  pounds  in  the  first  period,  but  less 
so  in  the  third  period. 

As  this  book  went  to  press,  in  October,  1 92 1,  marks  declined 
to  a  new  low  level  of  0.8o  and  gave  a  new  impetus  to  foreign 
purchases. 

A.  Causes  of   Fluctuation 

i.   Trade  Causes 

The  chief  trade  cause  of  the  decline  in  exchange  was  an  excess 
of  imports  in  part  due  to  illegal  imports  through  the  so-called  "hole 
in  the  west,"  the  unguarded  frontier  across  which  goods  were 
smuggled.  A  large  supply  of  bills  or  marks  sold  by  foreigners  was 
thus  created.  Finally,  the  loss  of  the  invisible  credits,  arising  from 
interest  on  investments  and  shipping  services  accounted  in  part 
for  the  decline. 

(a)   Excess  of  Merchandise  Imports — 

For  five  years,  from  the  outbreak  of  the  war  to  the  signing  of 
the  peace,  Germany  was  in  restricted  intercourse  with  the  sources 
of  supply  of  raw  materials.  The  country  was  denuded  of  goods 
essential  for  life.  As  a  result  of  lifting  the  blockade  in  the  second 
half  of  19 19,  the  underfed  and  ill-clothed  population  imported 
tremendous  quantities  of  goods.  The  balance  of  trade  became  un- 
favorable to  an  extent  without  precedent  in  German  history. 
Furthermore,  as  a  result  of  the  occupation  of  the  western  areas  of 
Germany  by  the  Allied  armies,  the  effective  control  of  imports  was 
impossible  and  vast  quantities  of  luxury  goods,  cigarettes,  choco- 
lates, perfumes  and  jewelry  poured  into  the  country.  These  il- 
legal imports  were  due  in  part  to  the  desire  to  taste  the  joys  of 
pre-war  days  once  more  and  in  part  to  the  rapid  inflation  of  the 
currency,   whose    purchasing   power   diminished   so   fast   that   the 


GERMAN    FOREIGN    EXCHANGE  45 1 

population  tried  to  convert  it  into  anything  at  all  that  decreased 
in  value  less  rapidly. 

On  the  other  hand,  exports  did  not  keep  pace  with  imports. 
There  was  a  lack  of  raw  material  and  of  coal.  Production  in  the 
early  part  of  1919  had  declined  and  even  the  increasing  foreign 
purchase  of  German  goods  on  hand  such  as  art  works,  securities 
and  property  in  general  did  not  balance  the  imports  owing  to  the 
continued  depreciation  of  the  mark.  The  extent  of  the  illegal 
importations  through  the  "hole  in  the  west"  was  enormous.  At 
one  coup  the  German  government  confiscated  mk.  1 1  million  of 
merchandise  which  was  imported  without  a  license.  The  closing 
of  the  "hole  in  the  west"  in  part  accounted  for  a  rise  in  the  Ger- 
man exchange  in  the  spring  of  1920.^  , 

(b)   Loss  of  Invisible  Credits — 

The  German  pre-war  investments  in  non-European  countries 
in  1905  were  mk.  16,000  million  acccording  to  the  Reichs-Marine- 
Amt.^  In  the  10  years  from  1905  to  19 14,  the  record  of  the 
compulsory  fee  stamp  for  all  foreign  securities  imported  into  Ger- 
many indicated  that  an  additional  mk.  4700  million  were  pur- 
chased. The  German  investments  in  Europe  amounted  to  mk. 
15,600  million,  distributed  as  follows: 

Million  marks 

Austria-Hungary  and  Bulgaria 4900 

Russia 4300 

European  neutrals 6400 

Adding  the  investments  in  Europe  and  elsewhere  the  total  pre-war 
investments  would  amount  to  mk.  35,000  million,  equivalent  to 
about  $9,000  million  although  other  estimates  shov/  lower  totals.* 


Year 

Billion  marks 

Authority 

1914 
1913 
1905 
1893 
1892 

25 

20 
16 
12 
10 

Ballod  and  Pistorius 

Helfferich 

Von  Halle 

Koch 

Schmoller 

*  Verwaltungsbericht  der  Reichsbank,  1919. 

Report  of  Consul  Frederick  Simpich  at  Berlin  in  Commerce  Reports, 
July  13,  1920. 

'J.  Riesser,  The  Great  German  Banks  and  Their  Concentration,  pp. 
545-546.     National  Monetary  Commission  Report. 

Cooperation  in  the  American  Export  Trade,  Report  of  the  Federal 
Trade  Commission,  part  i,  p.  72. 

*  Keynes,  J.  M.,  Economic  Consequences  of  the  Peace,  p.  175,  Am.  Ed. 


452        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  pre-war  average  excess  of  imports  of  Getmany  amounted 
to  about  mk.  1600  million.  On  the  other  hand  shipping  earnings 
amounted  to  about  mk.  looo  to  1500  million.  Interest  on  in- 
vestments amounted  to  about  mk.  1700  million. 

Adding  the  shipping  earnings  and  the  interest  on  foreign  in- 
vestments, the  annual  invisible  credits  of  Germany  amounted  to 
about  mk.  3200  million,  leaving  a  net  credit  balance  of  about  mk. 
1600  million.  It  was  this  invisible  credit  which  made  it  possible 
for  Germany  to  import  gold  before  the  war,  to  increase  her  foreign 
investments  at  the  rate  of  mk.  500  million  to  mk.  1000  million 
per  annum,^  and  to  maintain  the  mark  at  parity  on  all  markets. 

As  a  result  of  the  war,  Germany  lost  her  mercantile  marine 
and  with  it  the  rich  revenue  that  it  earned  before  the  war.  German 
property  abroad  was  sequestered  by  the  enemy  and  income  there- 
from ceased.  German  insurance  companies,  branch  banks  and 
branch  trading  companies  abroad  were  liquidated.  Therefore 
Germany  was  no  longer  able  to  pay  for  an  excess  of  imports  of 
merchandise  as  before  the  war. 

ii.  Financial  Causes 

(a)   Sales  of  Marks  by  Foreigners — 

As  a  result  of  the  military  collapse  of  Germany,  marks  were 
sold  by  foreigners  in  neutral  countries,  in  Alsace-Lorraine,  and  in 
the  other  Central  Powers.  Dr.  Calmon,  Assistant  Director  of  the 
Darmstadter  Bank,  estimated  that  the  foreign  holdings  in  marks 
were  mk.  20,000  to  mk.  25,000  million  at  the  end  of  19 19.  This 
conforms  to  the  estimate  of  Ludwig  Bendix,  Chief  of  the  Division 
of  Foreign  Exchange  of  the  Ministry  of  Economics,  Other  esti- 
mates indicated  a  higher  figure.  The  Frankfurter  Zeitung  esti- 
mates that  mk.  3500  million  went  to  Switzerland  from  the  signing 
of  the  armistice  to  the  middle  of  1 91 9.  The  total  marks  in  Holland 
were  estimated  at  mk.  4000  to  mk.  5000  million. 

As  marks  depreciated,  holders  in  neutral  Europe  sold  to  avoid 
the  wasting  of  their  assets.  The  rapid  depreciation  of  the  mark 
completely  demoralized  those  merchants  of  the  neutral  countries 
who  held  marks  obtained  at  or  near  parity.®     Furthermore,  as  a 

°  Hobson,  C.  K.,  The  Export  of  Capital,  p.  161.  Keynes,  J.  M., 
Economic  Consequences  of  the  Peace,  p.  175. 

'Report  of  Consul  Frederick  Simpich,  Berlin,  Commerce  Reports,  Mar., 
19,  1920. 


GERMAN  FOREIGN  EXCHANGE  453 

result  of  the  differences  in  the  rate  of  exchange  which  prevailed 
on  the  east  and  west  bank  of  the  Rhine  in  1919,  marks  were 
bought  by  persons  on  the  east  bank  of  the  Rhine  at  a  lower  rate 
and  sold  on  the  west  bank,  where  they  were  stabilized,  at  a  higher 
rate/  Again,  large  offers  of  marks  were  made  in  the  neutral 
countries  by  holders  in  Alsace-Lorraine  shortly  after  the  armistice 
was  signed.  Upon  the  military  collapse  of  Germany  the  allies  of 
Germany,  who  had  large  holdings  of  marks,  dumped  them  on  the 
market  and  initiated  the  decline.^ 

(b)  Maturing  Loans — 

The  mark  depreciated  not  only  on  account  of  the  trade  balance. 
During  the  war  Germany  opened  short-term  credits  in  the  neutral 
countries  of  Europe  and  was  unable  to  meet  the  loans  maturing 
after  the  war.  Furthermore,  the  extensive  purchase  of  German 
currency  and  of  German  securities,  long-term  and  short-term,  by 
foreign  investors,  created  a  large  floating  supply  of  marks  which 
were  thrown  on  the  market  in  panic  when  German  exchange 
declined  rapidly  and  for  profit  when  exchange  began  to  improve. 

(c)  Flight  of  Capital — 

Furthermore,  the  heavy  tax  program  which  Germany  under- 
took for  the  purpose  of  meeting  its  budget  created  a  panic  among 
capitalists,  and  as  a  result  there  was  a  "flight  of  capital"  from 
Germany,  which  took  the  form  of  an  exportation  of  currency,  of 
securities,  and  of  precious  goods  at  sacrifice  prices,  for  the  purpose 
of  obtaining  non-German  currency.  This  eagerness  to  sell  marks 
naturally  depressed  the  German  rate  of  exchange  on  all  markets.^ 
The  flight  of  capital  was  undoubtedly  the  important  factor  in 
accounting  for  the  decline  of  the  mark.  In  fact,  the  surplus  of 
imports,  big  as  it  was,  was  a  relatively  insignificant  cause.  The 
smuggling  abroad  of  marks  and  securities  was  on  such  an  enormous 
scale  that  early  in  1 920  when  German  exports  were  rapidly  increas- 
ing, the  exchange  rate  of  the  mark  was  continually  falling. 

Another  cause  of  the  decline  was  a  premature  and  unwise 
announcement  from  Weimar  that  on  July  23,  1919,  "all  current 
German  paper  money  would  be  replaced  by  bonds  or  emergency 

'  Frankfurter  Zeitung,  Dec.  27,  1918. 

•Welthandel,   Dec.   13,    1918. 

'Reichsbank  Report  for  1919.    Welthandel,  Dec.  13,  1918,  Feb.  28,  1919. 


454        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

paper  in  order  to  determine  how  much  property  is  available  in 
Germany  for  inevitable  taxation."  Under  this  decree  old  money 
would  have  been  declared  invalid,  stocks  and  bonds  would  have 
been  subjected  to  stamping,  and  all  unstamped  papers  would  have 
lost  their  value.  This  announcement  led  to  a  panicky  flight  of 
capital  and  raised  such  a  storm  of  protest  that  the  plan  had  to  be 
abandoned.  Upon  the  announcement  at  Weimar,  marks  dropped 
from  23  florins  to  16  florins  in  Amsterdam.  However,  its  abandon- 
ment did  not  restore  confidence  or  halt  the  exodus  of  all  forms  of 
wealth  from  Germany.^" 

New  methods  for  the  escape  of  capital  were  devised.  Neutral 
newspapers  printed  advertisements  offering  help  to  Germans  who 
wished  to  save  their  fortunes  by  smuggling  currency  or  securities.^^ 
Again,  a  popular  and  legal  method  of  taking  capital  abroad  was  the 
establishment  by  German  industries  of  branches  in  neutral  countries. 
Raw  materials  were  imported  into  Germany  and  the  manufactured 
goods  exported  and  prices  calculated  on  such  a  basis  that  the  bulk 
of  the  profit  fell  to  the  foreign  agency.  Although  German  labor 
was  afforded  employment,  the  amount  of  German  taxable  income 
was  reduced.  Again,  exporters  would  hold  in  banks  abroad  the 
foreign  currency  received  in  payment,  thus  providing  no  means  for 
the  German  importer  to  pay  for  goods. 

Upon  the  abandonment  of  the  plan  for  the  collecting  and 
stamping  of  currency  and  securities,  the  German  government 
devised  a  check  on  the  flight  of  capital  by  requiring  that  interest 
coupons  and  dividends  be  collectible  only  through  banks  and 
bankers  and  that  tax  authorities  have  access  to  bank  records.  These 
regulations  included  securities  held  not  by  the  banks  but  in  private 
vaults  or  abroad.  Foreigners  residing  in  Germany  and  holding 
securities  had  to  prove  that  no  German  interests  were  involved. 

International  cooperation  would  cover  the  flight  of  capital,  not 
only  from  Germany,  but  from  other  countries  which  proposed 
heavy  taxation. 

iii.  Monetary  Causes 

Probably  the  most  potent  cause  of  the  depreciation  of  German 
exchange  was  the  inflation  of  the  currency.    The  enormous  increase 

"Article  in  the  Algemeen  Handelsblad,  Amsterdam,  Nov.  2,  1919, 
printed   in    Commerce    Reports,    Nov.    29,    1919. 

''  Copenhagen  correspondence,  London  Economist,  Oct.  11,  1919. 


GERMAN    rOREIGN    EXCHANGE  455 

in  the  circulation  of  Reichsbank  notes  and  of  loan  bureau  notes 
caused  the  depreciation  of  the  paper  mark  both  at  home  and 
abroad.  On  the  other  hand,  the  surrender  of  gold  by  Germany  in 
order  to  pay  for  food,  aggravated  the  discount  on  paper,  for  it 
postponed  the  ultimate  redemption  of  paper.  The  relevant  facts 
are  given  fully  in  the  section  on  German  currency  and  credit. 

iv.  Fiscal  Causes 

The  increase  of  the  currency  was  due  to  the  inability  to  balance 
the  budget.  The  increase  of  public  expenditures  resulted  in  deficits 
which  the  state  covered  by  borrowing  notes  from  the  Reichsbank 
against  short-term  bills.  The  huge  expenses  imposed  upon 
Germany  by  the  terms  of  the  armistice  increased  the  deficit  and 
therefore  the  note  circulation,  and  thus  in  turn  further  depreciated 
the  mark.  The  very  drastic  tax  legislation  passed  by  Germany 
helped  to  balance  the  budget  and  thus  was  a  factor  in  preventing 
a  worse  depreciation  of  the  mark. 

When  the  budget  is  made  to  balance,  when  the  Reichsbank 
holdings  of  treasury  bills  are  decreased,  thus  making  possible  a 
deflation  of  the  note  circulation,  the  paper  mark  should  rise,  be- 
cause of  the  increasing  likelihood  of  redemption  in  gold. 

v.  Political  Conditions 

(a)  Military  Factors — 

In  addition  to  the  direct  influences  of  imports  and  exports,  the 
flight  of  capital,  the  increase  in  paper  money  and  the  deficit  in  the 
budget,  there  were  other  important  determinants  of  fluctuations  in 
the  rates  of  exchange.  The  rise  of  the  mark  in  the  neutral  coun- 
tries at  the  end  of  191 6,  when  President  Wilson  attempted  to 
secure  "peace  without  victory,"  and  3t  the  end  of  191 7,  when 
Lord  Lansdowne's  statement  was  taken  as  an  augury  of  peace, 
showed  the  sensitiveness  of  the  exchange  rate  to  political  conditions. 
Similarly,  the  appeal  for  an  armistice  by  the  Central  Powers  in 
October,  191 8,  improved  the  rate  for  marks  in  the  neutral  coun- 
tries. In  spite  of  the  obvious  defeat  of  the  Central  Powers,  peace 
was  expected  to  improve  the  fundamental  conditions,  and  thus  to 
correct  the  depreciation  of  the  mark.  Bulgaria's  abandonment  of 
her  allies  was  expected  to  depress  the  mark.  However,  because 
it  was  regarded  as  a  forerunner  of  peace,  mark  rates  rose  in  Switzer- 


4S6        INTERNATIONAL   FINANCE    AND   ITS    REORGANIZATION 

land  from  65,25  the  day  before  the  defection  to  66.50  the  day 
following.  On  October  5,  19 18,  when  the  Imperial  Chancellor 
made  his  appeal  for  peace,  the  mark  rose  to  69.00  and  a  week 
later  to  77.50,  the  high  rate  in  May,  1918  and  December,  1917. 

(b)  Internal  Disorders — 

On  the  other  hand,  the  internal  disorders,  the  Spartacide  revolt, 
and  even  the  brief  Kapp  coup  d'etat  depressed  the  mark.  The 
mark  was  very  sensitive  to  internal  disorders  after  the  armistice. 
During  those  trying  days  when  a  stable  government  was  being 
established,  the  mark  rose  and  fell  with  the  prospect  of  success  or 
failure  of  the  new  regime.  The  release  of  the  control  of  foreign 
exchange,  the  abrogation  of  the  Devisenordnung,  and  the  restora- 
tion of  free  trading  in  foreign  exchange,  caused  a  collapse  in 
September,  1919.  The  rescission  of  regulations  on  import  and 
export  trade  acted  like  the  opening  of  a  sluice,  and  there  was  a 
rush  of  imports  as  well  as  large  purchases  of  foreign  currency. 

(c)  International  Restrictions — 

International  political  conditions  of  course  had  a  profound  effect 
on  the  mark.  The  announcement  of  the  terms  of  the  armistice 
depressed  the  mark,  for  the  surrender  of  the  German  mercantile 
marine  and  the  indemnity  clauses  indicated  that  there  would  be  no 
annual  invisible  credit  to  ofifset  an  excess  of  imports.  The  splitting 
off  of  the  provinces  on  the  French  and  Polish  borders,  the  destruc- 
tion of  Germany's  economic  unity,  the  isolation  of  European  and 
Asiatic  Russia,  the  general  uncertainty,  which  was  prolonged  over 
two  years  after  the  armistice  was  signed,  the  failure  promptly  to 
fix  the  amount  of  the  indemnity  and  to  define  Germany's  obliga- 
tions, were  important  influences  in  demoralizing  German  exchange. 
The  failure  of  the  Allies  to  make  provision  for  the  restoration  of 
the  economic  life  of  Germany  to  a  normal  basis,  and  the  lack  of 
raw  materials  and  of  credit,  were  additional  factors  in  depressing 
the  mark.^^ 

(d)  International  Cooperation — 

On  the  other  hand,  the  extension  of  loans  to  Germany  for  raw 
materials,  the  development  of  financial  devices,  such  as  refining 

"  Wirtschafts-Zeitung,  Mar.  i,  1920.  Bank  Archiv,  Feb.,  1920. 
Report  of  Consul  Frederick  Simpich,  Berlin,  printed  in  Commerce  Reports, 
Mar.  19,  1920. 


GERMAN    FOREIGN    EXCHANGE  457 

credits  and  shipping  raw  materials  under  a  trustee  arrangement, 
and  the  provision  of  other  means  of  restoring  Germany's  trade 
were  reflected  in  a  rise  of  the  mark  on  the  several  exchanges.^^ 

B.  The   Effects  of  the   Decline 

The  effects  of  the  decline  were  commercial  and  financial. 
Imports  were  checked  and  exports  were  stimulated.  Foreigners 
invested  in  German  securities  and  bought  up  German  industries. 
The  mark  quotation  for  international  securities  rose  as  the  exchange 
rate  declined. 

i.   The  Effects  on  Prices 
(a)    The  Gap  between  German  and  World  Prices — 

I.  The  facts — ^As  a  result  of  the  extraordinary  decline  of 
exchange,  the  purchasing  power  of  foreign  currencies  in  Germany 
increased.  As  exchange  declined  toward  the  end  of  1919  Baron 
von  Richthofen  declared  in  the  National  Assembly  that  "upon  the 
present  basis  of  exchange,  Germany  is  the  cheapest  country  in  the 
world  to  live  in."  In  September,  19 19,  when  the  mark  was  at 
about  25  per  cent  of  gold  parity  in  Sweden,  Professor  Knut  Wick- 
sell  calculated  that  as  the  Swedish  crown  had  only  40  per  cent 
of  its  pre-war  purchasing  power,  the  German  mark  had  only  10 
per  cent  of  its  pre-war  purchasing  power  in  Sweden.  But  prices  in 
Germany  had  risen  only  about  four  or  five-fold.^*  The  same  dis- 
parity in  purchasing  power  of  British  and  German  currencies  was 
observed  in  England.  The  phenomenon  may  be  anomalous,  but 
it  is  easily  explained.  The  fall  of  the  mark,  due  chiefly  to  the 
flight  of  capital,  proceeded  so  rapidly  that  domestic  prices  could 
not  rise  proportionately.  Of  course,  the  price  of  imported  goods 
rose  pari  passu  with  the  fall  of  the  mark.  Furthermore,  the  rise 
of  prices  had  been  legally  checked  during  the  war,  and  Germany 
was  practically  an  isolated  industrial  community.  Upon  the  advent 
of  peace  and  the  reestablishment  of  international  trade  connections, 
the  disparity  between  German  and  world  prices  became  evident. 
Foreigners  hastened  to  buy  in  Germany  and  thus  bid  prices  up 
and  took  goods  away  from  the  domestic  consumer.  On  the  other 
hand  the  German  consumer  had  to  pay  very  high  in  marks  for 
imported  products  which  were  competitive  with  German  goods. 

"Berlin  letter  of  Mar.  9,  1920  of  correspondent  of  London 
Economist. 

"London  Economist,  Oct,  ii,  and  Dec.  5,  1919. 


458        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Although  paper  was  scarce  in  Germany  and  abundant  in 
Sweden,  typewriting  paper,  which  sold  in  Stockholm  at  i6  crowns 
per  thousand  sheets,  sold  in  Berlin  for  mk.  i8,  equivalent  to  2^ 
crowns.  The  same  held  true  for  other  supplies.  A  razor  whose 
pre-war  price  was  mk.  8  sold  for  mk.  47.50,  but  with  prices  cal- 
culated in  gold  the  razor  was  cheaper  than  in  1914.  Even  though 
goods  were  scarce,  the  gold  price  in  Germany  was  cheaper  than 
that  abroad. 

2.  The  effects — a.  Rise  in  German  prices — As  a  result  of 
the  anomalous  cheapness  of  German  commodities  prices  gradually 
rose.  Between  August,  19 14,  and  January  i,  1919,  the  price  of 
coal  increased  by  mk.  ii.So  per  ton,  but  in  the  first  six  months  of 
19 19  the  increase  was  mk.  40.60.  Similar  large  increases  were  made 
in  the  price  of  other  commodities.  The  price  per  ton  of  structural 
steel,  which  between  May,  19 14,  and  December,  19 1 8,  rose  from 
mk.  no  to  mk,  220  only,  was  increased  to  mk.  520  by  May,  1919, 
and  to  mk.  715  by  September,  1 91 9,  although  as  much  as  mk,  lOOO 
was  paid  if  prompt  delivery  was  assured.  The  cycle  was,  first  an 
increase  in  the  price  of  imported  goods,  then  an  increase  in  the 
cost  of  living,  then  an  increase  in  wages,  and  in  overhead,  and 
finally  a  rise  in  the  price  of  domestic  products.  When  the  mark 
declined  very  rapidly,  so  that  the  price  of  German  goods  fell 
further  below  the  world  level  of  prices,  German  exporters  added 
an  export  premium  on  their  wares.  However,  the  subsequent  rise 
in  prices  made  such  an  artificial  step  unnecessary. 

b.  Inability  to  deliver  goods  for  export — As  a  result  of  the 
low  level  of  prices  in  Germany,  her  industries  were  flooded  with 
orders.  In  some  instances  special  freight  facilities  had  to  be  pro- 
vided to  the  neighboring  neutral  countries.  However,  this  activity 
was  short  lived.  Germany  lacked  goods  when  the  armistice  was 
signed,  and  the  artificial  stimulus  given  to  German  exports  by 
the  rapid  decline  of  the  mark  depleted  the  stocks  and  cleared  the 
warehouses  of  Germany.  Foreign  merchants  who  had  ordered 
supplies  from  Germany  did  not  receive  the  goods  and  had  to  pay 
the  world  price  for  them  in  other  markets.^^  The  gap  between  the 
price  levels  in  Germany  and  elsewhere  hastened  the  exhaustion  of 
German  supplies. 

^"London  Economist,   Oct.   11,   1919. 


i 


GERMAN    FOREIGN    EXCHANGE 


459 


c.  "Germany's  clearance  sale" — The  disparity  between  prices 
in  Germany  and  elsewhere  attracted  foreigners,  who  flocked  to 
Germany  to  live,  thus  to  increase  the  purchasing  power  of  their 
incomes.  Furthermore,  purchasing  agents  thronged  to  Germany 
to  attend  "Deutschland's  Ausverkauf,"  the  auction  sale  of  Germany, 
as  the  Vossiche  Zeitung  termed  it.  Even  though  Germany  was 
practically  bare  of  leather  and  copper,  the  low  value  of  the  mark 
made  it  profitable  to  ship  these  much  needed  raw  materials  out 
of  Germany.  When  owing  to  lack  of  raw  materials  it  was  no 
longer  possible  to  have  goods  made  to  order  in  Germany,  foreigners 
would  buy  up  the  stocks  on  hand.  Art  works  particularly  were 
taken  in  great  quantities  by  foreigners,  in  spite  of  the  increased 
prices  charged  by  dealers.  Not  only  commodities  but  securities 
and  industries  were  purchased  by  foreigners.  The  French  bought 
shares  in  German  iron  and  steel  works,  or  the  plants  themselves, 
as  well  as  hotels  and  other  real  estate  in  the  important  cities,  and 
famous  resorts.^*^ 

(b)   Price  Changes — 

I.  The  fall  in  exchange  and  the  rise  in  prices — ^As  a 
result  of  the  competitive  demand  of  all  Europe  for  German  com- 
modities, prices  rose  sharply.  Within  a  few  months  Germany 
underwent  a  price  revolution  which  in  the  rest  of  the  world  took 
five  years.  All  the  greater  is  the  wonder  that  there  was  no  social 
upheaval  during  the  process.  Import  prices  rose  and  domestic 
prices  followed  suit.  Within  a  fraction  of  a  year  the  price  of 
wood  pulp  and  paper  imported  from  Scandinavia,  for  example, 
increased  several  fold  and  the  price  of  the  domestic  German  supply 
rose  correspondingly.^'^     A  few  typical  prices  are  given  herewith: 


Commodity 


Tin,  per  kilo 

Nickel,  per  kilo 

Pig  iron,  per  kilo 

Coal,  per  ton 

Hematite  iron,  per  ton 
Cast  iron,  per  ton .  . . . 


Dec,  igii 
Marks 


6.70 

12.00 

0.60 

44.00 

315-00 

249 . 00 


Dec,  1919. 
Marks 


65.00 

40.00 

7.00 

152.00 

2227.00 

1636.00 


Ratio, 
1919  to  191J 


^'London  Economist,  Oct.  11,  1919,  Nov.  29,  1919  and  Dec.  6,  1919. 
Also  Affars  Varlden,  Stockholm,  Sweden,  Oct.  22,  1919,  printed  in 
Commerce  Reports,  Dec.   12,  1919. 

"London  Economist,  Feb.  14,  1920. 


460        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  commodities  which  rose  most  were  hides,  leather,  textiles, 
the  non-ferrous  metals,  and  foreign  goods.  The  finished  goods 
rose  less  in  price  because  the  cost  of  production  did  not  rise  in  the 
same  proportion  as  the  cost  of  the  imported  raw  material. 


2.  The  rise  in  exchange  and  the  fall  in  prices — Until 
February,  1920,  the  mark  fell  on  the  foreign  exchanges,  but  rose 
thereafter  for  several  months.  During  the  latter  period  prices  in 
marks  of  imported  goods  fell.  Just  as  import  prices  were  most 
sensitive  to  the  fall  in  exchange,  so  they  were  as  responsive  to  the 
rise  in  exchange.  The  price  of  cotton  and  the  exchange  rates 
are  given  herewith  :^^ 


Date 

Exchange 

rates. 
Marks  per 

dollar 

Raw  cotton 
in  Bremen. 
Marks  per 
kilo 

Cotton  yam 

in  Stuttgart. 

Marks  per 

kUo 

Cotton  cloth. 

Marks  per 

meter 

1920: 
March  3 

99-65 
92.00 
63.40 
60.02 
54-27 

86 
80 
70 

73 
62 

150 
150 
140 

125 
105 

March  17 

April  7 

18.00 
1750 

April  21 

17.00 

May  =; 

15.50 

The  dollar  declined  or  the  mark  rose  about  45  per  cent.  The 
price  of  imported  raw  cotton  declined  25  per  cent,  but  the  price 
of  the  finished  cloth  declined  18  per  cent. 

The  correspondence  between  the  depreciation  of  German 
exchange  and  the  rise  in  prices  and  the  correspondence  bet\veen 
the  improvement  of  German  exchange  and  the  fall  in  prices  are 
shown  in  the  table  on  page  461.^^ 

The  close  correspondence  between  exchange  rates  and  the  price 
of  commodities  made  trading  in  imported  materials  a  gamble  in 
exchange,  and  a  menace  to  industry.  As  German  prices  to  the 
foreigner  rose  with  the  appreciation  of  the  mark,  foreign  orders 
in  Germany  fell  off  and  industrial  stagnation  set  in.  Foreign 
buyers  complained  that  German  prices  were  exorbitant  and  were 

"  From  the  Berliner  Boersen  Zeitung,  May  12,  1920,  Commerce  Reports, 
July  20,  1920. 

"  Deutsche  Allgemeine  Zeitune,  May  19^  1920,  Commerce  Reports, 
July  20,  1920. 


GERMAN    FOREIGN    EXCHANGE 


461 


above  the  world  price  level.  At  such  a  time  American  sewing 
machines  undersold  domestic  machines  in  the  German  market,  and 
German  chemicals  were  no  longer  able  to  compete  with  American 
chemicals  in  price.-° 


German  Exchange 
Rates 

German  Metal  Prices 

Date 

In  Nether- 
land. 

Marks  per 
florin 

In  Swit- 
zerland. 
Marks  per 
franc 

Copper. 

Marks  per 

100  kilos 

Lead. 

Marks  per 
100  kilos 

Zinc. 

Marks  per 

100  kilos 

Alu- 

minimi 

Marks  per 

100  kilos 

1920: 
Jan.     I . . . 
Mar.  15. . . 
Mar.  31.  . . 
April  30 .  .  . 
May  II. . . 

18.56 
36.81 
26.97 
20.82 
17.88 

8.74 
16.18 
12.78 
10.21 

8.66 

2436 
4625 
3286 

2591 
2281 

900 

1725 

1150 

720 

595 

880 
1450 

HOC 

72s 

675 

3250 
6200 
4800 
3800 
3300 

(c)   Lower  Cost  of  Production — 

As  prices  rose  with  the  depreciation  of  the  mark,  workmen 
struck  for  higher  wages  to  compensate  for  the  increase  in  the  cost 
of  living.  Nevertheless,  wages  in  Germany  were  far  lower  than 
in  other  countries.  For  example,  in  the  Solingen  steel  industry 
Dr.  Bernhard  Schulze  estimated  that  a  workman  who  would  earn 
$4000  a  year  in  an  American  plant  earned  mk.  10,000  in  Germany, 
equivalent  to  about  $100  at  the  rate  of  exchange  in  March,  1920. 
The  overhead  expense  was  also  lower  in  Germany.  Before  the 
war  rent  in  Germany  was  25  per  cent  of  that  in  the  United 
States.  During  the  war  rents  rose  less,  owing  to  government 
regulation,  and  after  the  fall  of  the  mark  to  4  per  cent  of  its  pre- 
war value  in  February,  1920,  rents  in  Germany  were  about  i  per 
cent  of  the  rents  in  the  United  States.  German  coal  cost  the 
equivalent  of  $1.00  per  ton  and  German  railroad  freight  rates 
averaged  about  one-seventieth  of  American  rates.  In  February, 
1920  German  pig  iron  cost  the  equivalent  of  $18  per  ton.  As 
the  mark  appreciated  on  the  foreign  exchanges,  wages  were  not 

^Frankfurter  Zeltung,  Apr.  3,  1920.  Berlin  correspondence  London 
Economist,  June  5,  1920.  Berlin  cable  to  the  Department  of  Commerce, 
Commerce  Reports,  June  i,  1920. 


462 


INTERNATIONAL   FINANCE    AISTD    ITS    REORGANIZATION 


lowered,  because  the  cost  of  living  did  not  fall  as  rapidly  as  the 
cost  of  imported  raw  materials. 

Similar  evidence  of  the  low  cost  of  production  in  Germany  is 
afforded  by  a  comparison  of  wages  in  Sweden  and  in  Germany. 
The  average  daily  Swedish  wage  was  16  crowns  in  January,  192 1, 
and  at  the  rate  of  exchange  then  current  this  was  equivalent  to 
mk.  280.  The  highest  German  wage  at  the  time  was  mk.  60  per 
day,  or  the  equivalent  of  83  cents  in  American  currency.  The 
scale  of  wages  of  the  Association  of  Non-Manual  Employees  in 
the  Westphalian  coal  and  metal  industries  was  as  follows: 


Wage  earners 


Equivalent 
in  dollars 


Junior  clerks . . . 
Senior  clerks . .  . 
Junior  chemists 
Senior  chemists 


10 
31 

25 
55 


As  a  result  of  the  lower  cost  of  production  in  Germany, 
Swedish  industries  were  unable  to  compete  with  those  German 
industries  which  utilized  domestic  raw  materials.  The  price  per 
ton  of  Swedish  paper  was  kr.  1100  and  the  price  of  German  paper 
was  mk.  8000  or  equivalent  to  kr.  625.  However,  the  cost  of 
production  of  German  paper  was  only  mk.  2500  per  ton  and  the 
additional  mk.  5500  represented  the  export  premium  charged  to 
foreigners  under  the  law  of  December  20,  191 9.  The  only  com- 
modities which  in  Germany  cost  as  much  as  in  Sweden  and  Hol- 
land were  the  imported  raw  materials  for  which  Germany  had  to 
pay  at  the  world  price  level,  such  as  cotton,  copper  and  rubber. 
However,  upon  the  manufacture  of  these  raw  materials  into  finished 
products,  the  difference  in  price  level  reappeared  because  of  low 
wages,  rent  and  overhead  in  Germany.  As  a  result  of  this  dis- 
crepancy between  the  cost  of  production  in  Germany  and  in  other 
countries,  the  index  number  of  prices  moved  upward  in  Germany 
during  the  same  period  in  which  the  price  level  of  the  rest  of  the 
world  was  declining.  In  Germany  there  was  still  a  seller's  market 
while  in  the  rest  of  the  world  there  was  a  buyer's  market.^^ 


"^Berlin   and   Frankfurt  correspondence,   Journal    of   Commerce,   Jan. 
26,  1921. 


I 


GERMAN    FOREIGN    EXCHANGE  463 

(d)   Equalization  of  German  and  World  Prices — 

Although  ultimately  the  German  price  level  approximated  the 
world  price  level,  there  was  a  period  when  the  discrepancy  was 
a  source  of  difficulty.  Realizing  the  relative  cheapness  of  German 
goods  to  the  foreigner,  German  manufacturers,  with  the  encourage- 
ment of  the  government,  imposed  export  premiums  on  sales  to 
foreigners.  To  some  extent  this  action  was  justified,  because  con- 
tracts with  merchants  in  the  neighboring  neutral  countries  were 
made  on  the  basis  of  pre-w^ar  prices,  or  of  prices  fixed  during  the 
vvar.^-  Export  premiums  were  added  so  that  the  price  to  the 
foreigner  was  close  to  the  world  level,  yet  competitive  with  non- 
German  manufacturers.  The  premiums  were  highest  on  goods 
made  of  German  raw  materials,  such  as  glass,  porcelain  and  toys. 
But  on  goods  made  of  foreign  raw  materials  there  were  either 
lower  premiums  or  none  at  all.  As  a  result  of  the  higher  price 
paid  by  the  foreigner,  the  domestic  consumer  was  either  neglected 
or  else  German  manufacturers  attempted  to  raise  the  German 
price  level  to  the  world  price  level  by  adding  the  export  premium 
to  domestic  prices.  Otherwise,  the  producers  stated  they  would 
be  compelled  to  serve  the  foreign  market  exclusively. 

There  was  some  justification  for  this  policy  in  the  case  of 
industries  that  had  to  purchase  foreign  raw  materials,  such  as 
Swedish  iron  ores.  It  would  have  been  unprofitable  to  the  pro- 
ducer to  pay  high  import  prices  in  marks  on  raw  materials  unless 
producers  were  assured  of  correspondingly  high  export  prices  on 
the  finished  product.  This  situation  was  ultimately  relieved.  The 
purchasers  of  foreign  iron  ores  had  to  furnish  foreign  currency  in 
payment.  They  therefore  asked  their  domestic  customers,  who 
made  finished  steel  products,  either  for  foreign  currency,  or  else 
the  equivalent  in  German  marks.  This  compelled  the  manu- 
facturers of  finished  products  to  increase  prices  to  the  domestic 
consumer.  During  the  period  of  transition  there  was  an  unsettle- 
ment  of  industry  and  a  hardship  was  worked  upon  both  the  pro- 
ducer and  the  consumer. 

ii.  Commercial  Effects 
(a)  Stimulation  of  Exports — 

The  figures  of  German  trade  were  published  monthly  from 
January,   19 19,  to  May,   1920.     The  returns  during  this  period 

'"Loudon  Economist,  Feb.  28,  1920. 


464        INTERNATIONAL    FINANCE   AND    ITS    REORGANIZATION 


showed  at  first  a  huge  increase  in  imports  because  of  the  dire  need 
for  goods  in  Germany  after  the  lifting  of  the  blockade.  However, 
after  October,  19 19,  the  excess  of  imports  began  to  decline,  and  in 
April,  1920,  an  excess  of  exports  appeared,  which  was  doubled  in 
the  following  month.  For  the  rest  of  the  year  1920  figures  are 
not  available.-^ 

Foreign  Trade  of  Germany  ^* 
(in  million  marks) 


Date 

Imports 

Exports 

Excess  of 
imports 

Ratio  of 
exports  to 
imports. 
Per  cent 

1919: 
January 

397 
408 
440 

626 
1,468 
2,688 

3,538 
3,817 
4,191 

5,179 
4,446 
5,178 

161 

195 
292 

270 

251 
406 

57° 

735 
790 

1,089 
1,284 
4,014 

236 

213 
148 

356 
1,217 
2,282 

2,968 
3,082 
3,401 

4,090 
3,162 
1,164 

40.6 
47-7 
66.4 

43-1 
17. 1 

February 

March 

April 

May 

Tune 

1=1.1 

July 

16. 1 

August 

193 
18.9 

21.0 

September 

October 

November 

December 

28.9 
77-5 

Total,  1919.  •  . 

1920: 
January 

32,376 

6,560 
5,932 
5,683 

4,768 
5,537 

10,057 

3,219 
4,262 
4,216 

5,344 
6,647 

22,319 

3,341 
1,670 
1,467 

576* 
1,110* 

310 

49.0 
71.8 

February 

March 

74 -O 

April 

112. 0 

May 

I20.0 

*  Excess  of  exports. 

The  figures  for  exports  include  deliveries  for  reparation  in 
unstated  amounts,  and  it  is  therefore  impossible  to  determine  what 
proportion  of  the  exports  gave  rise  to  a  supply  of  foreign  bills. 

"'  See  Frankfurter  Zeitung,  Evening  Edition,  Sept.  27,  1920. 

"*  Economiste  Europeen,  Oct  i,  1920.  London  Economist,  Oct.  9,  1920. 
Commerce  Reports,  Nov.  13,  1920  and  Dec.  15,  1920.  The  accuracy  of 
these  statistics  has  been  questioned. 


GERMAN    FOREIGN    EXCHANGE  46$ 

It  is  worthy  of  note  that  the  exports  rose  to  a  level  of  about  mk. 
5000  per  month  and  remained  near  that  figure  from  September, 

1919,  to  May,  1920.  However,  in  view  of  the  fact  that  the 
exchange  rates  declined  from  about  4  cents  in  September,  1919,  to 
less  than  2  cents  in  March,  1920,  the  quantities  imported  must 
have  declined.  On  the  other  hand,  along  with  the  continuous 
depreciation  of  the  mark  during  19 19  and  through  the  spring  of 

1920,  exports  increased  continuously,  and  probably  caused  the 
subsequent  appreciation  of  German  exchange. 

The  decline  of  mark  exchange  stimulated  exports.  For  example, 
the  automobile  industry  was  unable  to  fill  foreign  orders.  In  spite 
of  the  fact  that  the  steel  industry  in  Solingen  raised  its  prices  by 
300  to  400  per  cent  orders  came  pouring  in  from  the  United 
States,  South  America  and  even  the  Dutch  East  Indies.  German 
manufacturers  were  able  to  underbid  other  foreign  competitors 
during  the  period  of  the  decline  of  the  mark.  The  stimulation 
of  exports  ceased  when  these  two  price  levels  were  equalized. 
When  the  mark  appreciated  in  the  spring  of  1920  Germany's 
advantage  as  an  exporter  diminished.  Foreign  orders  for  German 
goods  were  canceled.  Ordinarily  an  advance  of  German  exchange 
rates  would  be  accompanied  by  a  fall  in  German  prices,  but  no 
such  fall  took  place  in  the  spring  of  1 920,  because  the  price  level 
in  Germany  was  still  under  the  world  level.  When  the  mark 
depreciated  German  manufacturers  either  increased  prices  or  added 
an  export  premium,  or  else  refused  to  ship  at  old  prices.  When 
marks  rose,  foreigners  canceled  orders. 

(b)   Foreign  Competition — 

I.  In  the  home  markets — The  effect  of  declining  mark 
exchange  was  to  give  the  German  manufacturer  an  advantage 
over  his  foreign  competitor.  In  the  neutral  countries  with  which 
Germany  maintained  commercial  intercourse  during  the  war,  this 
effect  was  very  evident.  As  the  mark  declined  during  the  war 
German  manufacturers  did  not  raise  prices  because  of  the  loss 
of  the  world  market  and  the  decline  in  foreign  demand  for  German 
products.  A  few  examples  will  illustrate  this  point.  The  price 
in  Sweden  for  a  certain  type  of  German  electric  lamp  was  57  ore 
before  the  war  and  38  ore  in  June,  19 17.  A  brand  of  German 
hooks  cost  2.42  kroner  per  gross  before  the  war  and  1. 61  kroner 
in  June,   191 7.     Similar  reductions  in  Swedish  prices  of  German 


466        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION  ^ 

goods  applied  to  pianos,  boilers  and  a  long  list  of  commodities." 
As  a  result  of  the  exchange  bounty  to  German  manufacturers  the 
Sveriges  Industriforbund,  the  association  of  Swedish  manufacturers, 
petitioned  the  Treasury  to  increase  the  import  duties  to  com- 
pensate for  the  decline  in  German  exchange.^^  This  measure  was 
identical  with  the  request  of  the  wool  producers  of  the  United 
States  before  the  Ways  and  Means  Committee  of  the  House  in 
the  autumn  of  1920. 

This  experience  was  repeated  in  several  countries  and  at  sub- 
sequent periods.  In  Switzerland,  Germany  was  able  to  deliver 
goods  at  far  lower  prices  than  a  similar  grade  of  the  domestic 
product  cost  in  Switzerland.    For  example — 

Prices  in  Switzerland 


Commodity 

Of  German  goods 

Of  Swiss  goods 

Paper,  francs  per  pound  

20 
450 

70 

Chairs,  francs  each 

40 

Furniture,  francs  per  set 

1600 

The  effect  on  Swiss  industry  was  feared  and  as  in  Sweden  various 
manufacturers  proposed  an  embargo  on  German  products.  The 
iron  and  steel  manufactures  in  Switzerland  proposed  that  an 
arbitrary  rate  of  exchange  between  Switzerland  and  other  countries 
be  fixed  in  order  to  protect  Swiss  manufacturers  during  the  period 
of  falling  foreign  exchange.-'^  The  experience  in  France  was 
similar.  As  a  result  of  the  decline  of  the  Austrian  krone,  Austrian 
bentwood  chairs  sold  in  France  at  fr.  5  each,  whereas  French 
chairs  sold  at  fr.  25.^* 

The  French  government  placed  an  order  with  German  equip- 
ment companies  for  30,000  railway  trucks,  for  use  on  the  French 
state  railroads.  In  reply  to  a  protest  by  French  manufacturers, 
the  Minister  of  Public  Works  stated  that  the  German  bid  repre- 
sented a  saving  of  fr.  15,000  per  truck  compared  with  French 
and  foreign  offers.^'' 

2.  In    foreign   markets — Because   of    the   decline   of  mark 

"London  Economist,  Dec.  22,  1917. 

"  Deutscher   Aussenhandel,    June    20,    1917. 

"Zurich   dispatch,    New   York  Times,   Oct.  20,    1919. 

"London  Economist,  July   12,   1919. 

"London  cable  Journal  of  Commerce,  Dec.  i,  and  15,  1920. 


GERMAN  FOREIGN  EXCHANGE  467 

exchange  the  Germans  were  able  to  underbid  the  manufacturers 
of  other  countries  not  only  on  domestic  orders  but  also  on  foreign 
orders.  For  example,  German  and  British  firms  competed  on  a 
contract  for  locomotives  for  the  British  Dominions.  The  Germans 
took  the  order  at  £400,000 ;  the  lowest  British  offer  was  £680,000. 

A  contract  for  structural  steel  in  Holland  was  received  by 
a  German  firm  on  terms  far  below  those  of  British  competitors. 
The  German  price  for  the  fabricated  steel  was  lower  than  the 
quotation  for  raw  material  from  the  British  rolling  mills.  During 
the  period  when  the  mark  declined,^"  German  producers  were 
able  to  obtain  contracts  in  competition  with  those  of  other  coun- 
tries whose  exchange  rates  were  higher. 

German  equipment  companies  bid  successfully  against  Belgian, 
British,  French,  Swiss,  and  American  competitors  for  an  order  for 
locomotives  on  the  Spanish  railroads.^^ 

(c)   Barter — 

As  a  result  of  the  unsettling  effect  on  trade  of  fluctuations  in 
mark  exchange,  Germany  and  her  neighbors  resorted  to  barter 
in  various  forms.  The  impracticability  of  making  allowances  for 
variations  in  German  exchange  made  it  difficult  for  German 
importers  to  buy  essentials.  The  shortage  of  goods  in  Germany 
was  due  in  part  to  the  fact  that  trade  in  imported  commodities  had 
become  a  gamble  in  exchange.  To  avoid  these  difficulties  methods 
of  bartering  were  utilized.^^  The  scope  of  such  trade  of  course 
was  limited. 

The  fluctuations  of  both  German  and  French  exchange  com- 
plicated the  questions  of  reparations,  and  the  rehabilitation  of 
northern  France,  To  avoid  the  difficulties,  a  commission  of  Ger- 
man engineers  visited  northern  France  for  the  purpose  of  report- 
ing on  a  scheme  for  rebuilding  the  devastated  areas  with  German 
materials,  German  labor,  and  under  German  supervision.  The 
proposal  was  that  instead  of  paying  France  for  the  work  in  francs 
Germany  should  do  the  rebuilding  on  the  basis  of  the  German 
mark."^ 

"London  Times,  June  17,  1919.    Journal  of  Commerce,  July  8,  1919. 
"  Madrid  dispatch,  Journal  of  Commerce,  Jan.  28,   1921, 
**  Report  of  Consul   General  G.  E.  Anderson,  Rotterdam.     Commerce 
Reports,   Sept.  29,   1920. 

"London  Economist,  Aug.  30,   1919. 


468        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

A  new  form  of  barter  was  developed  after  the  war.  Germany 
would  receive  raw  materials  under  a  trust  agreement  and  the 
foreign  exporters  would  retain  title  to  the  goods.  German  manu- 
facturers would  work  up  imported  raw  materials  and  return  to 
the  foreign  shipper  stipulated  amounts  of  finished  goods  in  pay- 
ment. The  Deutsche  Waren-Treuhand  Aktiengesellschaft  was  a 
financial  institution  organized  to  aid  in  effecting  these  so-called 
refining  credits. 

iii.  Financial  Effects 

The  depreciation  of  mark  exchange  had  several  financial  effects. 
The  price  of  international  securities  rose  as  the  mark  fell.  Further- 
more, foreigners  bought  German  securities  and  industries.  By  an 
irony  of  fate  the  country  which  before  the  war  developed  economic 
penetration  to  a  high  degree,  became  the  victim  after  the  war  of 
the  same  process.  The  decline  of  the  mark  furthermore  made  it 
difficult  to  pay  interest  on  German  bonds  issued  in  foreign  monies. 
While  the  mark  depreciated  very  rapidly  and  continuously  German 
capital  fled  the  country,  primarily  because  holders  wanted  to  buy 
any  goods  or  values  which  were  likely  to  depreciate  less  rapidly 
than  the  mark. 

(a)    The  Rise  in  the  Price  of  Securities — 

The  rise  in  the  price  of  foreign  securities  listed  on  the  German 
stock  exchange  resulted  from  the  depreciation  of  the  mark.  As 
the  rate  of  exchange  improved  these  prices  fell.  The  so-called 
exchange  or  valuta  securities  were  very  sensitive  to  the  fluctuations 
of  exchange  rates,  because  the  underlying  assets  were  in  foreign 
currency.  For  example,  the  shares  of  Steua  Romana,  a  Rumanian 
oil  company,  rose  from  337  to  865  from  August  i,  1919,  to  Octo- 
ber 13,  1919.  The  shares  of  the  Pomona  Company  rose  from 
1050  to  3350  during  the  month  of  September,  1919,  and  by  Decem- 
ber 12,  1919,  they  reached  a  price  of  7000.  These  prices  should 
be  compared  with  the  exchange  rates  of  that  period.  The  monthly 
high  demand  rate  for  marks  in  New  York  was  6.25  cents  in 
September,  1919,  and  2.60  cents  in  December,  1919.^* 

**  Deutsche  AUgemeine  Zeitung,  Jan.  31,  1920.  Koelnische  Zeitung, 
June  4,  1919.  Berlin  correspondence,  Journal  of  Commerce,  Dec.  3,  1919, 
Jan.  21,  1920. 


GERMAN    FOREIGN    EXCHANGE 


469 


The  fluctuations  of  the  mark  affected  not  only  international 
securities,  or  securities  issued  in  foreign  currency,  but  also  native 
German  securities,  which  were  issued  in  marks.  Foreigners  pur- 
chased heavily  of  these  securities,  when  the  mark  depreciated.  The 
following  list  shows  the  course  for  five  bonds  and  15  stocks  from 
the  resumption  of  the  publication  of  official  quotations  on  Septem^ 
ber  I,  1 9 19,  by  intervals  up  to  May  8,  1920.  The  table  shows 
very  clearly  that  as  the  mark  depreciated,  from  September  i,  1919, 
to  March  i,  1920,  the  price  of  securities  rose  proportionately. 
German  exchange  improved  slightly  from  March  i,  1 920,  to  April 
13,  1920,  and  securities  prices  declined.  From  April  13,  1920  to 
April  20,  1920,  German  exchange  depreciated  again  and  securities 
prices  rose.  From  April  20,  1920,  to  May  8,  1920,  German  marks 
improved  again  and  securities  prices  declined. 

Relative  Fluctuations  of  Exchange  Rates  and  Securities  Prices  '^ 


Date 


Marks 
per  florin* 


Total 

price  t 

15  stocks. 

Marks 


Total 

price  t 

S  bonds. 

Marks 


Total  price 

of  stocks 

and  bonds. 

Marks 


1919: 
September  i 

1920: 
January  2 . 
March  i . 
April  13 . 
April  20 . 
May         8. 


7.82 


18.80 

36.77 
20.00 

22.75 
18.80 


3,S8i 


7,0x5 
12,109 
7,946 
9,076 
8,164 


S" 


630 
1107 
850 
840 
717 


4,093 


7,645 
13,216 

8,795 
9,916 
8,881 


*  I  mark  equals  23.82(5  at  parity,     i  florin  equals  40.2;!  at  paritj'. 

J  The  stocks  include  the  Deutscher  Bank,  the  Phoenix  Smelting,  Harpener  Iron,  Badische 
Anibn.  Deutsch-Asiatische  Bank,  Santung's  A  E.  G.  (General  Electric  Co.)  and  H.  A.  P. 
A-G  (Hamljurg-American  Line) . 

tThe  bonds  include  the  5  per  cent  War  Loan,  3  per  cent  Imperial  Loan,  4  per  cent  Prussian 
Loan,  4  percent  Frankfurter  Loan  and  s  per  cent  Mexican  Gold  Loan. 


(b)  Increase  in  Capital  Issues — 

The  depreciation  of  the  mark  upset  the  relation  between  the 
capitalization  of  corporations  and  the  current  prices  paid  for  raw 
materials.  It  was  a  common  experience  that  an  order  for  raw 
materials  for  a  few  months'  operation  would  amount  to  more  than 


*  Frankfurter    Zeitung,    May    10,     1920. 
Journal  of  Commerce,  Dec.  15,  1920. 


Frankfurt    correspondence, 


470        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

the  total  capitalization  of  a  company.  Again,  many  companies 
that  wished  to  extend  their  plants  would  find  that  the  capital  needed 
for  an  addition  was  larger  than  the  total  existing  capitalization. 
To  meet  the  many  difficulties  that  arose  because  of  the  differences 
in  value  between  the  gold  mark  and  the  paper  mark,  industrial 
companies  increased  their  capital,  declared  stock  dividends,  and  by 
other  means  attempted  to  equalize  the  old  and  new  values  of  the 
mark. 

Capital  Issues  Before,  DnoNG  and  After  the  War  '* 


Year 

Million  marks 

1913 

317 

1914 

191S 
1916 

322 
"3 

1920 
Fourth  quarter,  1919. . . 
Second  quarter,  1920. . . 
Fourth  quarter,  1920. . . 

11,514 
1,898 
2,768 
4,242 

The  depreciation  of  the  mark  to  about  one-twenticiih  of  its 
pre-war  value  resulted  in  an  increase  of  capital  issues  of  about  35 
times. 


(c)  Investments  by  Foreigners,  Economic  Penetration  and  the 
Remedy — 
As  a  result  of  the  decline  of  the  mark,  large  sums  of  German 
treasury  bills  were  bought  by  foreign  investors,  who  furnished 
exchange  for  German  interest-bearing  securities  of  all  kinds.^^  In 
addition  to  buying  securities,  foreigners  bought  all  sorts  of  property 
In  Germany.  In  one  Berlin  quarter  an  entire  block  of  houses  was 
sold  to  Danes,  Swiss  and  Hollanders.  Americans  bought  large 
apartment  houses  at  absurdly  low  figures.  A  modern  five-story 
Berlin  apartment  house  of  60  rooms  and  worth  400,000  gold  mk. 
sold  for  the  equivalent  of  $13,000  at  the  rate  of  exchange  pre- 
vailing in  July,  1920.^® 

"The  figures  for  1920  are  from  the  monthly  circular  of  Stenger, 
Hoffmann  &  Co.,  Berlin  bankers.  Deutsche  Allgemeine  Zeitung,  Jan.  3, 
1921.    The  earlier  figures  are  from  British  Board  of  Trade  Journal,  1917. 

*'  Frankfurter  Zeitung,   May  8,   1920. 

"Berlin  correspondence,  Journal  of  Commerce,  July  22,   1930. 


I 


GERMAN    FOREIGN    EXCHANGE  47  ^ 

Plants  and  often  entire  industries  drifted  into  foreign  hands. 
The  German  Transatlantic  Electric  Co.,  which  owned  and  operated 
electric  light  and  power  systems  and  public  utilities  in  Buenos 
Aires,  Montevideo,  Valparaiso,  Santiago  and  Mendoza,  was  bought 
up  by  a  syndicate  of  Spanish  banks.  The  capitalization  in  1914 
was  mk.  150  million,  but  in  June,  1920,  this  w^as  equivalent  to 
about  one-tenth  that  sum  in  gold  marks.^^  The  Royal  Netherlands 
Blast  Furnace  and  Steel  Works  bought  up  the  large  German  plant 
of  the  Phoenix  Company.  An  English  concern  bought  up  the 
mines  and  estates  of  the  Prince  of  Pless,  in  Upper  Silesia,  and 
the  mines  and  plant  of  the  Prince  Donnersmark  of  Silesia  were 
bought  by  Americans.  Belgian  firms  bought  up  zinc  mines  and 
zinc  smelting  plants  in  the  same  region.  Dutch  margarine  com- 
panies purchased  three  large  German  oil-seed  and  oil-cake  mills. 
British  shipping  interests  bought  up  hotels  in  Bremen,  Hamburg 
and  Danzig.  Frenchmen,  Danes  and  Americans  bought  up  office 
buildings  and  large  blocks  of  real  estate  in  Frankfurt  and  Berlin. 
The  French  bought  up  the  river  fleets  of  the  Rhine,  at  Mannheim, 
Ludwigshafen,  Mainz  and  Kehl. 

The  penetration  of  foreign  capital  affected  also  German  bank- 
ing interests.  The  Banque  du  Rhin  established  branches  at  Frank- 
furt, Cologne,  Neustadt  and  Muhlheim,  and  the  Banque  National 
de  Credit  of  Paris  opened  branches  in  Mainz,  Wiesbaden  and 
Ludwigshafen.  The  Credit  Rhenin  established  branches  in 
Cologne,  Mayence,  Aix  la  Chapelle  and  Sarrebruck.*° 

Foreigners  denationalized  German  undertakings  by  the  purchase 
of  securities  and  plants,  by  the  acquisition  of  the  facilities  of 
industrial,  shipping  and  commercial  concerns,  and  by  the  purchase 
of  German  banks  or  the  establishment  of  foreign  banks  in  Germany. 
Alarmed  at  this  extensive  invasion  of  German  industrial  property 
rights  by  foreigners,  German  capitalists  checked  the  transfer  of  con- 
trol out  of  German  hands,  by  means  of  the  amalgamation  of  indus- 
tries, the  concentration  of  capital,  and  the  issuance  of  preference 
shares  with  comprehensive  voting  rights  which  were  confined  to 
German  nationals  resident  in  Germany.  Upon  the  transfer  of 
securities  to  a  foreigner,  all  voting  privileges  lapsed.  One  of  the 
difficulties  of  the  system  of  multiple  votes  was  that  German  capi- 

"  La  Epoca,  Madrid,  June  21,  1920  and  Commerce  Reports,  July  30, 
1920. 

•"The  New  Europe,  April   9,  1920. 


472        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

talists  were  able  with  comparatively  small  capital  to  obtain  control 
of  large  rival  companies.*^ 

(d)   Ejfect  on  German  Bonds  Abroad — 

As  a  result  of  the  depreciation  of  mark  exchange,  debtors  of 
German  investors  were  eager  to  repay  their  loans.  For  example, 
the  Province  of  Buenos  Aires  had  mark  bonds  outstanding  in  the 
amount  of  mk.  40,800,000.  The  loan  was  placed  with  German 
banks  in  1910  at  89.  In  the  autumn  of  1919  the  Argentina  gold 
dollar,  normally  worth  $0.9648  American,  or  about  four  gold 
marks,  was  worth  over  20  paper  marks.  The  repayment  of  the 
mark  debt  would  yield  a  handsome  profit  to  the  debtors  and 
negotiations  to  extinguish  the  debt  were  initiated. *- 

On  the  other  hand,  German  bonds  issued  in  foreign  currency 
presented  another  phase  of  the  unsettlement  of  values.  As  the 
mark  depreciated  it  became  increasingly  difficult  for  German  cor- 
porations to  pay  interest  on  bonds  issued  in  foreign  currencies. 
In  1907  the  Elektrische  Licht  und  Kraftanlagen  A-G  in  Berlin 
issued  a  43^  per  cent  loan  of  fr.  10  million  in  Switzerland,  the 
interest  on  which  amounted  to  fr.  450,000  per  annum.  At  the 
close  of  the  financial  year  September  30,  19 19,  this  sum  at  the 
prevailing  rate  of  exchange  amounted  to  mk.  1,980,000  and  on 
February  13,  1920,  the  sum  amounted  to  mk.  7,425,000  or  about 
one-quarter  the  entire  capital  stock  outstanding.  As  a  result,  the 
dividend  had  to  be  passed  and  as  the  loan  matures  in  1927,  repay- 
ment seems  impossible.*^ 

C.  Correctives  of  Depreciation 

The  correctives  of  depreciation  in  Germany  were  the  same  as 
in  the  other  countries.  On  the  one  hand  depreciated  exchange 
tended  to  correct  itself  by  stimulating  exports.  On  the  other 
hand,  the  government  restricted  imports  for  the  purpose  of  improv- 
ing exchange  rates.  Gold  shipments  were  made  chiefly  to  cover 
purchases  of   food   and  other  indispensable   goods.     The  sale  of 

"Haase,  E.,  Das  Eindringen  Auslandisches  Kapital  in  das  Deutsche 
Wirtschaftsleben,  Die  Bank,  Feb.,  1920,  pp.  106-119.  Frankfurt  cor- 
respondence, Journal  of  Commerce,  Dec.  15,  1920.    The  New  Europe,  ibid. 

■"London  Economist,   Oct.   11,    1919. 

*' Deutsche  Allgeraeine  Zeitung,  Dec.  13,  1920.  Koelnische  Zeitung, 
Feb.  20,  1920. 


GERMAN    FOREIGN    EXCHANGE  473 

securities  and  borrowing  abroad  were  the  financial  correctives. 
Finally,  the  German  government  regulated  trading  in  exchange 
with  a  view  to  eliminating  violent  fluctuations.*^ 

Herr  Erzberger,  the  Minister  of  Finance,  in  an  address  to  the 
National  Assembly,  outlined  the  means  for  correcting  the  deprecia- 
tion of  German  exchange,  as  follows: 

Regulation  of  exports  and  imports. 

Restoration  of  the  customs  frontier  in  the  west,  and  prevention 
of  smuggling. 

Control  by  the  Ministry  of  Finance  of  all  transactions  with 
foreign  countries. 

Securing  of  credit  of  neutral  bankers. 

Facilities  for  the  purchase  of  raw  materials  needed  by  the 
German  industries. 

Prevention  of  emigration  of  capital. 

Domestic  order,  stable  political  conditions  and  untiring  labor. 

i.  Trade  Correctives 

(a)  Self-Correctives — 

The  self-corrective  effect  of  the  depreciation  of  the  mark  was 
noted  in  the  discussion  on  the  effects  of  depreciation.  In  May, 
1 91 9,  the  ratio  of  exports  to  imports  was  1 7. 1  per  cent.  The  ratio 
Improved  and  in  November,  19 1 9,  it  was  28.9  per  cent.  In  1920 
the  ratio  of  exports  to  imports  continued  to  increase  from  49.OO 
per  cent  in  Januar}^,  1920,  to  74  per  cent  in  March,  1920.  In 
May,  1920,  exports  were  greater  than  imports  and  the  ratio  was 
120  per  cent.     For  the  first  five  months  of   19 19  the  ratio  was 

35.0  per  cent  and  for  the  corresponding  period  of   1920  it  was 

83.1  per  cent. 

(b)  Trade  Policy — 

Even  during  the  war  the  German  economists  preached  that 
the  post-war  trade  policy  should  aim  to  prohibit  luxury  imports, 
and  to  promote  the  consumption  of  substitutes  made  in  Germany.*^ 
The  Minister  of  Finance,  addressing  the  Wurtemburg  legislative 

**  Professor  Mombert,  Thoughts  on  the  Balance  of  Trade  of  Germany 
after  the  War,  Europaische  Staats-und-Wirtschafts  Zeitung,  Apr.  27,  1918. 

^'^  George  Bernhard,  editor  of  Plutus,  a  financial  paper,  advocated  this 
course    continuously    during    1918. 


474  NTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

chamber,  announced  Germany's  trade  slogan  as,  "Export  much 
and  import  little."  *®  In  order  to  restrict  imports  and  to  promote 
exports  it  was  necessary  to  adopt  as  a  permanent  policy  the  increase 
of  production  particularly  of  goods  for  export  and  the  decrease  of 
consumption,  particularly  of  imported  goods.  The  increase  of 
production  required  as  a  prerequisite  the  maintenance  of  industrial 
order,  political  stability  and  continued  application  to  work. 

(c)   Barter  and  Refining  Credit — 

One  of  the  effects  of  the  depreciation  of  the  mark  was  the 
resort  to  barter  on  a  limited  scale,  particularly  where  the  distances 
involved  were  not  great.  Barter  was  also  one  of  the  means  of 
correcting  the  depreciation  of  exchange,  especially  in  cases  of 
bartering  finished  goods  for  the  raw  materials  of  which  they  were 
manufactured. 

Examples  of  simple  barter  were  common.  Germany  shipped 
coal,  iron  and  steel  to  Holland  and  obtained  Dutch  foodstuffs, 
chiefly  cheese  and  butter,  in  exchange.  This  practice  was  common 
even  during  the  war,  when  German  notes  depreciated  and  the  Ger- 
man government  refused  to  ship  gold.*'^  Again  in  June,  1919, 
Switzerland  and  Germany  entered  into  a  formal  arrangement 
whereby  Germany  agreed  to  permit  the  exportation  to  Switzerland 
of  coal  and  briquettes,  sugar  and  potash,  in  exchange  for  milk 
products,  chocolate,  vegetables,  canned  fruits  and  live  stock. 

A  more  extensively  used  form  of  barter,  however,  was  the 
importation  by  Germany  of  raw  materials,  such  as  hides,  and  the 
exportation  of  boots  and  shoes  made  from  the  tanned  leather. 
The  arrangement  involved  one  or  more  deals.  Hides  might  be 
bartered  for  leather  and  leather  in  turn  for  shoes.  Sometimes  the 
entire  output  of  finished  products  would  be  bartered  again  by  the 
Dutch  for  some  other  German  manufactured  products,  such  as 
dyestuffs  or  drugs.*^  The  scheme  of  bartering  raw  materials  for 
finished  goods  was  developed  further.  A  group  of  bankers  organ- 
ized a  trust  company,  the  Deutsche  Industrie  Treuhand  A-G, 
with  the  object  of  securing  credit  for  German  firms  for  the  pur- 
chase  of   raw  materials   intended   for   reexport   as  manufactured 

*•  Berliner  Zeitung  am  Mittag,  Aug.  1,  1918. 
*'  Norddeutsche  Allgemeine  Zeitung,  Oct.  26,  1918. 
*"  Report  of  Consul  General  S.  Listoe,  Rotterdam,  Commerce  Reports, 
Oct,  22,   1919. 


GERMAN  FOREIGN  EXCHANGE  475 

goods.  The  corporation  acted  as  trustee  for  these  firms.  The 
German  manufacturer  imported  raw  materials  and  gave  his  obliga- 
tion in  payment.  In  addition  the  manufacturer  occasionally  secured 
the  endorsement  of  his  bank.  As  the  goods  were  made  up  there 
was  an  increase  in  the  security  underlying  the  obligation  of  the 
German  manufacturer.  The  function  of  the  trustee  was  to  look 
after  the  interests  of  the  foreign  shipper  with  whom  the  title  to 
the  goods  remained.  By  means  of  this  arrangement  the  risk  of 
fluctuations  of  exchange  was  avoided  and  it  became  possible  for 
Germany  to  increase  the  value  of  its  exports  without  depreciating 
the  exchange  rate  of  the  mark  as  the  result  of  prior  imports  of 
raw  materials. 


ii.  Gold  Shipments 

Like  France,  Germany  followed  the  policy  of  increasing  its 
gold  supply  during  the  war  in  the  hope  of  facilitating  the  resump- 
tion of  specie  payment  after  the  war.  Some  exportation  of  gold 
was  unavoidable.  Germany  offered  to  Dutch  banks  at  very  favor- 
able terms  two-year  treasury  bills  secured  by  German  municipal 
bonds  and  endorsed  by  German  banks.  Upon  the  refusal  of  the 
Dutch  bankers  to  make  the  loan  the  Reichsbank  was  compelled 
to  ship  gold  to  Amsterdam.  The  rate  of  florins  per  lOO  marks 
fell  from  34.60  in  June,  191 7,  to  7.10  in  July,  1920,  as  com- 
pared with  a  parity  of  59.20.  With  the  permission  of  the  Allied 
governments  shipments  of  gold  were  made  to  Switzerland  to  the 
extent  of  40  million  gold  marks  for  the  repayment  of  loans  nego- 
tiated during  the  war.*^ 

The  function  of  gold  as  a  corrective  of  exchange  is  limited. 
Gold  will  correct  the  exchanges  when  there  is  a  temporary  and 
slight  fluctuation.  Under  the  conditions  prevailing  during  and 
after  the  war  shipments  of  gold  alone  would  have  been  futile  as 
a  corrective,  for  the  depreciation  was  not  temporary,  it  was  not  due 
to  trade  causes  but  to  inflation,  and  there  was  not  enough  gold 
in  any  of  the  European  central  banks  to  correct  the  exchanges. 
The  shipment  of  gold  would  have  exhausted  the  supply  and  national 
bankruptcy  would  have  been  inevitable. 

"London  Economist,  July  5,   1919. 


k 


476        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

iii.   The  Flow  of  Capital 

Important  means  of  correcting  German  exchange  were  the  sale 
of  German  holdings  of  foreign  securities  as  well  as  German  public 
and  private  securities,  the  speculative  purchase  by  foreigners  of 
marks,  and  long  and  short-term  loans  to  Germany. 

(a)  Sale  of  Securities — 

Like  the  governments  of  Great  Britain  and  France  the  German 
government  requisitioned  foreign  bonds  under  an  order  dated 
March  26,  19 19.  The  government  sold  the  securities  and  reim- 
bursed the  original  owners.  Furthermore,  the  government  permit- 
ted the  unrestricted  exportation  of  specified  foreign  securities  pro- 
vided the  proceeds  of  the  sale  abroad  were  placed  at  the  disposal  of 
the  Reichsbank.^^ 

Large  amounts  of  German  bonds  were  bought  by  American 
investors  and  speculators.  At  times  the  purchases  ran  as  high  as 
$1,000,000  a  day,  it  is  said,  and  the  purchases  included  securities 
of  the  Imperial  Government,  of  cities,  of  land  mortgage  banks, 
and  of  industries. 

(b)  Foreign  Speculation  in  Marks — 

The  rapid  depreciation  of  the  mark  stimulated  the  purchase  of 
currency  and  drafts  by  persons  who  expected  to  make  a  profit 
upon  the  improvement  of  German  exchange.  As  a  result  billions 
of  marks  flowed  out  of  Germany.  Bendix  estimated  that  in  the 
midsummer  of  1920  over  mk.  20,000  million  of  the  mk.  64,000 
million  in  circulation  were  held  outside  of  Germany.  Professor 
Taussig  thinks  the  estimate  too  high.  The  purchase  of  marks  by 
foreigners  during  the  period  of  the  decline  arrested  the  fall.  How- 
ever, the  large  foreign  holdings  of  currency  and  short-term  bills 
tended  to  check  a  recovery  in  marks,  for  as  the  mark  rose  holders 
would  sell,  either  to  take  a  profit  or  to  lessen  their  losses. 

To  check  the  depressing  influence  of  the  large  foreign  float- 
ing supply  of  marks,  it  was  proposed  to  fund  the  holdings  in  the 
neutral  countries  of  Europe,  and  to  issue  interest-bearing  bonds 
and  shares  in  German  industrial  enterprises.  The  funds  thus  ac- 
cumulated were  to  be  used  in  part  to  finance  the  imports  of  raw 

■"Commerce  Reports,  Nov.  3,  1919. 


GERMAN    FOREIGN    EXCHANGE  477 

materials.  The  proposal  for  a  "German  Mark  Central  Banking 
Institute,"  however,  was  not  consummated  in  spite  of  its  many 
obvious  advantages,  not  only  to  the  Germans  but  also  to  the 
foreign  holders  of  mark  currency  and  bills.^^ 

(c)   Borrowing  by  Germany — 

Even  during  the  war  plans  were  made  for  the  sale  in  the 
neutral  countries  of  German  short-term  loans  and  treasury  certif- 
icates for  the  purpose  of  purchasing  raw  materials  and  maintain- 
ing the  exchange  rates.^-  To  encourage  borrowing  abroad  the 
German  government  in  issuing  import  licenses  gave  preference 
to  those  applicants  who  obtained  credit  abroad.  However,  with 
the  abrogation  of  the  control  of  exchange  and  trade,  this  device 
was  abandoned. ^^ 

The  function  of  loans  in  correcting  the  depreciation  of  ex- 
change is  limited.  As  the  exchange  would  improve  upon  issuing 
a  foreign  loan,  the  hoarded  marks  would  tend  to  be  thrown  on  the 
market  and  would  thus  neutralize  the  benefits  of  the  loan  intended 
to  correct  the  depreciation.  A  large  foreign  loan  would  not  put 
an  end  to  the  depreciation  of  the  mark,  for  if  the  marks  hoarded 
abroad  were  returned  to  Germany,  inflation  would  be  increased 
and  the  mark  would  depreciate  further.  Foreign  loans  could 
check  depreciation  only  in  so  far  as  they  furnished  credit  for  the 
purchase  of  raw  materials  which  would  help  restore  production 
and  exports.  Upon  the  maturity  of  the  loan  the  mark  would 
depreciate  further.  Loans  merely  defer  payments  and  do  not 
afford  a  permanent  corrective.  However,  if  the  postponement  of 
the  payment  should  enable  Germany  to  recuperate  in  the  interval, 
a  foreign  loan  would  have  a  permanent  corrective  effect. 

I.  Borrowing  in  Holland — In  April,  19 19,  it  was  proposed 
that  the  neutral  states  make  a  joint  loan  of  mk.  1 500  million  to 
Germany  under  the  supervision  of  the  Allies.  Nothing  came  of  the 
plan,  however.  Subsequent  loans  to  Germany  were  made  individ- 
ually by  the  several  neutral  neighbors  of  Germany.     During  the 

"Report  of  Commercial  Attache  Norman  L.  Anderson,  Copenhagen, 
Commerce  Reports,  Aug.  9,  1920.  Report  of  Minister  J.  C.  Grew,  Copen- 
hagen, July  16,  1920.  Deumer,  R.,  Valutaspeculationsbank  auf  hy- 
pothekarischer   Grundlage,   Die  Bank,   Jan.,    1920,   pp.   31-38. 

""Commerce  Reports,   May  16,   1918. 

"  Cable  of  Commercial  Attache  Edwards,  Amsterdam,  Commerce 
Reports,  Oct.  28,   1919. 


478        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

war  these  countries  extended  advances  to  Germany  in  a  way 
similar  to  the  advances  made  in  the  United  States  to  the  Allied 
powers  before  April,  19 17.  After  almost  a  year  of  negotiation  a 
revolving  credit  of  200  million  florins,  payable  in  lO  years  at  6 
per  cent,  was  opened  by  Holland  in  favor  of  Germany,  of  which 
60  million  florins  were  to  be  spent  in  the  purchase  of  foodstuffs 
from  the  Netherlands  and  the  Dutch  East  Indies.  On  the  other 
hand  Germany  bound  herself  to  supply  a  certain  quantity  of  coal 
to  Holland  monthly  for  four  years  and  until  1953  to  send  to  Hol- 
land half  of  the  output  of  the  mines  in  specified  German  territory 
near  the  Dutch  frontier,  at  a  price  to  be  based  on  the  monthly 
average  price  of  English  and  American  coal.  This  loan  was  finally 
ratified  on  December  28,  1920.^* 

A  group  of  Dutch  bankers,  under  the  leadership  of  the  Neder- 
landsche  Handelsmaatchappij,  opened  a  revolving  credit  of  60 
million  florins  in  favor  of  a  group  of  German  manufacturers 
for  the  importation  of  raw  materials  such  as  cotton,  copper,  and 
steel.  Half  of  the  manufactured  goods  produced  from  the  raw 
materials  was  to  be  reexported  to  the  Netherlands  and  disposed  of 
by  the  Dutch  banking  syndicate  in  order  to  pay  the  credit  on  which 
the  raw  materials  were  furnished,^^ 

2.  Borrowing  in  Switzerland — During  the  war  Switzerland 
extended  loans  to  Germany,  The  German  government  notified 
Swiss  firms  that  certain  goods  would  be  admitted  into  Germany 
only  on  the  condition  that  the  Swiss  exporters  accept  payment  in 
mark  credits  maturing  three  months  after  the  signing  of  peace. 
On  the  other  hand,  Swiss  cooperative  credit  associations  were 
formed  for  the  purpose  of  financing  luxury  exports  to  Germany 
and  thus  keeping  the  industries  going.  The  objections  to  the  plan 
were  that  Swiss  manufacturers  had  to  pay  for  raw  materials 
promptly  and  it  was  a  doubtful  economic  policy  to  foster  the  impor- 
tation of  unnecessary  goods  into  Germany.^'' 

The  shortage  of  coal  in  Switzerland  during  the  war  was  one 
of  the  reasons  for  Swiss  loans  to  Germany.  A  group  of  German 
banks  received   advances  proportionate  to   the   quantity    of    coal 

"Koelnische  Zeitung,  Evening  Edition,  Jan.  22,  1920.  Amsterdam 
correspondence,  London  Economist,  June  19,   1920. 

"Report,  Commercial  Attache  P.  E.  Edwards,  The  Hague,  Commerce 
Reports,  Jan.  21,   1920. 

"Frankfurter  Zeitung,  July  11,  1917. 


GERMAN    FOREIGN    EXCHANGE  479 

imported  into  Switzerland.  But,  in  addition  to  paying  for  coal 
received,  the  Swiss  coal  iirms  had  to  give  notes  the  proceeds  of 
which  were  advanced  to  Germany  against  the  deposit  of  securities.^^ 
The  debt  of  Germany  to  Switzerland  in  the  middle  of  1 9 19  was 
350  million  gold  marks. 

3.  Borrowing  in  other  countries — During  the  war  Ger- 
many also  borrowed  in  the  Scandinavian  countries.  Arrangements 
between  a  syndicate  headed  by  the  Deutsche  Bank  and  the  Norges 
Bank  for  a  loan  to  refund  previous  loans  and  to  furnish  credit 
for  German  purchases  in  Norway  under  special  trade  agreements 
were  concluded,  whereby  Germany  furnished  coal  and  other  essen- 
tial goods  to  the  needy  neutrals  of  Europe.^^ 

The  German  government  attempted  to  borrow  the  equivalent 
of  about  $100  million  in  Argentina  for  the  purchase  of  foodstuffs 
at  the  time  that  the  Allied  governments  were  negotiating  for  a 
loan  from  Argentina  of  $200  million.  Again  under  the  post-war 
agreement  between  the  Allied  premiers  and  the  German  delegates, 
the  Allied  governments  advanced  money  to  Germany  for  food- 
stuffs and  raw  materials  needed  in  Germany  to  insure  the  delivery 
of  adequate  coal  to  France  under  the  Treaty  of  Peace.  The  total 
amount  so  advanced  by  the  Allies  up  to  the  autumn  of  1920 
amounted  to  about  £3  million. 

iv.  Control  of  the  Exchanges  ^^ 

(a)    Trade  Bills — 

I.  Devisenordnung — On  January  20,  1916,  an  order  of  the 
Bundesrat,  the  Devisenordnung,  created  a  Devisenzentrale,  and 
provided  that  dealings  in  foreign  exchange  be  reserved  to  specified 
banks  and  banking  firms  in  Berlin,  Hamburg  and  Frankfurt,  which, 

"Koelnische  Zeitung,  Aug.  8,  1917.  Berliner  Aktionar,  Aug.  4,  1917 
and  Hamburgischer  Correspondent,  Aug.  2,  1917. 

"Tidens   Tegn,    Sept.    15,    1918. 

"  Deutschlands  Finanz-und-Handelsgesetze  im  Kriegs-Gesetze,  Verord- 
nungen  und  Bekanntmachungen  aus  dem  Bank,  Borsen-Devisen- 
verkehr,  Wahrungs-Finanz-und  Steuerwesen,  Handels-Wechsel-,  und 
Schreckrecht  in  Deutschland  wahrend  des  Krieges,  by  Joh.  Notzke,  Libra- 
rian of  the  Reichsbank  (Berlin,  1917,  Carl  Flemming  Verlag).  Interview 
with  Herr  Ludwig  Bendix,  chief  of  the  Foreign  Exchange  Bureau  of  the 
Ministry  of  Commerce.  Reported  by  Consul  Frederick  Simpich,  Berlin, 
July  31,   1920. 


480        INTERNATIONAL   FINANCE   AND    ITS    REORGANIZATION 

under  the  supervision  of  the  Reichsbank,  should  supply  the  foreign 
exchange  necessary  for  the  importation  of  goods.  The  argument 
in  favor  of  the  centralization  of  foreign  bills  was  that  the  classifica- 
tion by  countries  and  due  dates  made  it  possible  to  steady  the 
fluctuations  in  exchange.  Again,  the  prohibition  of  imports  by 
legislation  was  likely  to  raise  more  hostility  in  foreign  countries 
than  the  regulation  of  imports  by  a  control  of  foreign  bills.  On 
the  other  hand  there  was  strong  objection  to  bureaucratic  control 
of  trade  and  to  any  hindrances  to  the  free  play  of  commerce  vrhereby 
alone  the  mark  exchange  could  be  improved. ''^  The  importation 
of  non-essential  goods  was  prohibited  soon  thereafter  as  a  means 
of  regulating  the  mark.  In  January,  1917,  orders  were  issued 
prohibiting  the  general  importation  and  exportation  of  goods  except 
by  license  of  the  Imperial  Commissary  for  Imports  and  Exports. 
On  February  8,  19 17,  according  to  additional  exchange  regulations 
permission  of  the  Reichsbank  was  required  for  remittances  to 
foreign  countries  of  bills  payable  in  marks  and  for  the  incurring 
of  liabilities  in  foreign  currency."^ 

The  inconvenience  to  trade  and  commerce  as  a  result  of  the 
Devisenordnung  and  the  frequent  protests  against  it  after  the 
armistice  led  to  its  repeal  on  September  15,  19 19.  The  result  was 
a  sharp  fall  in  foreign  exchange,  due  in  part  to  the  release  of  con- 
trol, in  part  to  the  vast  increase  in  imports  of  goods,  and  lastly  to 
the  flight  of  capital,  which  was  made  easier  by  the  repeal  of  the 
Devisenordnung. 

2.  Devisenbeschaffungsstelle — In  view  of  the  fact  that 
the  government  was  a  large  importer  of  food  and  other  essential 
goods,  it  was  thought  necessary  to  control  at  least  that  part  of  tUe 
foreign  exchange  business  in  which  the  government  was  directly 
interested.  The  Devisenbeschaffungsstelle  for  the  regulation  of 
government  exchange  transactions  was  organized  in  September, 
191 9,  with  a  nominal  capital  of  mk.  300,000,  owned  by  the  several 
government  purchasing  departments,  the  Reichseinkaufstelle,  such 
as  the  Wheat  Bureau,  the  Meat  Bureau,  etc.  The  Devisenbeschaf- 
fungsstelle, next  to  the  Reichsbank  was  the  largest  purchaser  of 
foreign  exchange  in  Germany. 

"Dr.  Bernhard,  editor  of  Plutus,  in  articles  throughout  1917  and  1918. 
Also  Weser  Zeitung,  Feb.  6,  1918. 
"Koelnische  Zeitung,  Aug.  5,  1917. 


I 


GERMAN  FOREIGN  EXCHANGE  481 

3.  The  Reichsbank — ^The  Reichsbank  was  a  powerful  influ- 
ence in  controlling  foreign  exchange.  It  accomplished  this  end 
chiefly  by  regulating  the  issue  of  credits  and  thus  restricting  imports. 
Upon  the  repeal  of  the  regulations  on  July  23,  1919,  the  influence 
of  the  Reichsbank  was  reduced  and  imports  greatly  increased. 

In  order  to  provide  exchange  for  essential  imports  the  Reichs- 
bank purchased  export  bills  of  exchange.  By  selling  to  the  Reichs- 
bank long-term  bills  drawn  on  foreign  merchants  by  German 
exporters,  they  were  protected  from  the  risks  of  holding  "futures" 
and  the  bank  was  able  to  provide  importers  with  the  necessary 
credits.  Furthermore,  the  bank  obtained  "future"  bills  resulting 
from  the  sale  of  securities  abroad  and  by  the  purchase  of  foreign 
bills  and  currency.''^  These  Reichsbank  operations  in  foreign 
exchange  futures,  Devisentermingeschaefte,  helped  to  steady  the 
market  for  exchange. 

Foreign  exchange  transactions  were  left  entirely  unrestricted 
after  August  19,  1920.  Upon  the  release  of  control  of  the  foreign 
exchanges,  spot  transactions  only  were  permitted,  so  that  a  business 
man  placing  an  order  for  raw  materials  for  future  delivery  or  con- 
tracting to  deliver  manufactured  goods  to  a  foreign  buyer  had  no 
means  of  knowing  how  many  marks  he  would  pay  or  receive  when 
the  contract  matured.  On  December  17,  1920,  the  Bundesrat 
approved  a  bill  legalizing  transactions  by  the  public  in  foreign 
exchange  futures,  in  the  expectation  of  checking  the  wide  fluctua- 
tions in  exchange,  German  merchants  could  thus  transfer  the  risks 
to  dealers  in  foreign  exchange. 

(b)   Security  Dealings — 

The  control  of  foreign  exchange  involved  bills  arising  not  only 
from  trade  but  also  from  transactions  in  securities  with  foreigners 
or  for  foreign  account.  To  check  the  flight  of  capital  the  German 
National  Assembly  on  August  16,  19 19,  passed  a  law  prohibiting, 
except  through  the  agency  of  banks,  the  exportation  of  all  media 
of  payment,  such  as  currency,  paper  money,  banknotes,  drafts, 
checks  and  bills  of  exchange,  involving  German  or  foreign  currency. 
Orders  for  the  exportation  of  media  of  payment  to  foreign  coun- 
tries might  be  executed  by  banks  only  if  application  were  made  on 
forms  prescribed  by  the  Minister  of  Finance.    A  copy  of  the  form 

"^  Reichsbank  Report,  1919.  See  also  Federal  Reserve  Bulletin  June, 
1920. 


482        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

was  sent  to  the  Property  Tax  Office.  The  Minister  of  Finance 
was  also  empowered  to  seize  capital  hidden  or  sent  out  of  the 
country.  ^^ 

V.  Fiscal  and  Monetary  Correctives 

During  the  period  of  the  suspension  of  gold  payments  the  cor- 
rection of  foreign  exchange  may  be  accomplished  by  the  deflation 
of  the  currency  and  the  balancing  of  budgets.  These  two  factors 
are  inseparable.  The  failure  to  balance  the  budget  leads  to  borrow- 
ing by  the  government  from  the  central  bank  and  to  the  issue  of 
notes  by  the  central  bank  against  treasury  bills.  The  depreciation 
of  the  currency  resulting  from  fiscal  and  monetary  causes  can  be 
corrected  by  deflating  the  currency,  and  increasing  budget  receipts. 
After  government  credit  is  deflated,  the  stabilization  of  foreign 
exchange  with  the  existing  gold  supply  may  be  undertaken. 
Before  an  effective  control  of  foreign  exchange  by  means  of  dis- 
count rates  can  be  established,  governments  must  balance  their 
budgets,  cease  borrowing  of  the  banks,  and  retire  the  excessive 
treasury  bills,  and  the  bank  must  cease  issuing  additional  notes 
and  reduce  the  amounts  outstanding.  The  restoration  of  public 
credit  is  a  prerequisite  to  the  restoration  of  private  credit,  and 
both  are  conditions  for  the  correction  of  the  foreign  exchanges. 

^' Paper  No.  11  on  Exchange  Control,  submitted  to  the  International 
Financial  Conference  at  Brussels.    London:    Harrison  &  Sons,  Ltd.,  1920. 


SECTION  B 

FACTORS  IN  THE  FINANCIAL 
REORGANIZATION 


CHAPTER  XIII 

THE    CAPITAL    LEVY    IN    GREAT    BRITAIN    AND 
OTHER  COUNTRIES  ^ 

A.  Is  A  Levy  Necessary? 

f.  Distribution  of  Wealth 

The  advocates  of  a  capital  levy  base  their  proposal  upon  the 
poor  distribution  of  wealth.  Before  the  war,  the  rich,  t\vo  per 
cent  of  the  population  of  Great  Britain,  possessed  64  per  cent  of  the 

^Material  In  this  chapter  is  based  on  the  following  sources: 
Lawrence,  F.  W.  Pethick,  A  Levy  on  Capital.     London,  George  Allen  & 

Unwin,  Ltd.,  1918. 
Hobson,  J.  A.,  Taxation  in  the  New  State.     New  York,  Harcourt,  Brace 

and   Howe,   1920. 
Memoranda    submitted    by   the   Board   of   Inland   Revenue   to   the    Select 

Committee  of  the  House  of  Commons  on  Increases  of  Wealth  (War), 

London,  H.  M.  Stationery  Office,  1920  (Cmd.  519). 
Report  of  Select  Committee  on  Increase  of  Wealth   (War).     London,  H. 

M.  Stationery  Office,  1920. 
Pigou,  A.  C,  A  Special  Levy  to  Discharge  War  Debt.    Economic  Journal, 

XXVIII.     no,  135-157,  June,   1918. 
Arnold,  Sydney,  A  Capital  Levy,  Economic  Journal,  157-167,  June,  1918. 
Hook,  A.,  A  Tax  on  Capital  and  Redemption  of  Debt,  Economic  Journal, 

June,  1918,  167-176. 
Scott,   W.   R.,    Some   Aspects   of   the   Proposed   Capital   Levy.     Economic 

Journal,  XXVIII,  iii,  247-268,  September,  1918. 
Mitchell,  A.  A.,  A  Levy  on  Capital.     Economic  Journal,  268-276,  Septem- 
ber,  1918. 
Stamp,  J.  C.,  An  Estimate  of  the  Capital  Wealth  of  the  United  Kingdom 

in  Private  Hands.     Economic  Journal,  276-287,  September,  1918. 
Allen,   J.   E.,  A   Capital   Levy.     Fortnightly  Review,   238-247,    February, 

1918. 
Marriott,  J.  A.  R.,  The  Conscription  of  Wealth,  The  Nineteenth  Century, 

248-262,    February,    1918. 
Balfour-Brown,  J.  H.,  A  Menace  to  Peace,  The  Nineteenth  Century,  905- 

920,  November,  1918. 
Samuel,    Herbert,   The   Plight   of  the   Taxpayer   and   the   Remedy.     The 

Contemporary  Review,  601-608,  December,  1919. 
Pigou,  A.   C,   The   Problem  of   the   National    Debt.     The   Contemporary 

Review,  621-628,  December,   1919. 
House  of  Commons  Debates,  for  1919  and  1920.     May  i,  1919,  Cols.  440 

et  seq.,  Oct.  30,  1919,  Cols.  1040  et  seq. 

485 


486        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

wealth ;  the  comfortable  class,  10  per  cent,  possessed  24  per  cent  of 
the  wealth;  the  poor,  the  remaining  88  per  cent,  possessed  12  per 
cent  of  the  wealth.  These  figures  are  based  upon  the  inheritance- 
tax  returns  of  Great  Britain  for  1913-14.  The  accumulation  of 
profits  during  the  war  and  their  investment  in  war  loans  accen- 
tuated the  uneven  distribution  of  wealth,  while  the  poor,  as  the 
result  of  inflation  were  deprived  of  purchasing  power  over  goods. 
The  advocates  of  the  capital  levy  point  out  that  the  rich  possess 
after  the  war  as  before,  the  greater  part  of  the  wealth  of  the 
country  and  in  addition  have  a  lien  upon  the  production  of  wealth 
in  the  future. 

ii.  Difficulty  in  Balancing  the  Budget 

The  advocates  of  the  levy  maintain  that  it  will  be  impossible 
to  balance  the  budget  owing  to  the  high  charges  on  account  of  the 
public-debt  service.  In  the  two  years  following  the  war  the  budget 
was  made  to  balance  by  including  not  only  current  revenue,  but 
also  funds  obtained  from  the  sale  of  war  supplies  and  other  assets. 
However,  the  difficulties  expected  really  are  manageable  and  the 
Chancellor  of  the  Exchequer  was  able  to  balance  the  budget  of 
1920-21  and  expects  to  do  so  in  after  years  without  having  to 
resort  to  a  capital  levy. 

iii.   The  Evils  of  High  Taxes 

If  the  capital  levy  is  not  put  into  effect,  its  sponsors  say  that 
high  super-taxes  on  income  will  be  necessary.  These  encourage 
extravagance,  for  they  take  away  incentive  to  work  and  to  save. 
Furthermore,  in  a  graduated  scale  of  taxes,  the  rate  on  an  addition 
to  an  income  is  always  higher  than  the  rate  on  the  whole  amount 
to  which  the  addition  raises  it.  Thus,  extra  effort  is  penalized 
and  production  is  deterred.  High  taxes  may  compel  the  migration 
of  capital  and  man  power  in  order  to  escape  the  burdens  on  new 
accumulations  of  capital.  A  capital  levy  may  induce  an  illegal 
flight  of  capital,  but  methods  may  be  devised  to  prevent  it,  as  in 
Germany.  A  capital  levy  leaves  future  production  unburdened. 
Again  high  taxes  result  in  an  increase  in  the  cost  of  production  at 
home  and  in  an  inability  to  meet  the  competition  of  those  countries 
that  are  not  subject  to  similar  steep  taxes.     Furthermore,  to  tax 


THE   CAPITAL   LEVY   IN   GREAT   BRITAIN  4% 

interest  on  capital  very  heavily  might  destroy  London's  prestige 
as  the  world's  central  investment  market. 

iv.  Deflation  Increases  the  Burden  of  Taxation 

The  process  of  deflation  after  the  war  means  a  fall  In  prices 
and  an  increase  in  purchasing  power  of  money.  The  real  burden 
of  taxation  is  therefore  increased,  and  more  goods  or  a  larger 
percentage  of  the  total  national  product  must  go  to  pay  interest 
on  the  debt.  It  is  economical  for  the  state  to  get  rid  of  its  burden 
while  inflated  prices  prevail.  As  prices  fall  the  burden  of  liquidat- 
ing the  debt  may  embarrass  the  country  particularly  in  a  period 
of  depression.  War  loans  were  floated  when  prices  were  high 
and  if  they  are  to  be  repaid  when  prices  are  low,  the  state  will  pay 
more  than  it  received  in  goods  and  the  holder  will  receive  a 
greater  purchasing  power  than  he  loaned  to  the  state. 

B.  Policy  in  Handling  the  Debt 
i.    The  Psychological  Factor 

Because  the  limit  of  exemption  from  the  income  tax  is  very 
low  in  Great  Britain,  there  is  considerable  pressure  back  of  the 
proposal  for  a  capital  levy.  The  large  class  of  income-tax  payers 
would  benefit  by  a  capital  levy  and  they  favor  it.  The  security 
owners,  who  would  bear  the  burden  of  the  capital  levy,  oppose  it. 
Viewed  from  the  angle  of  selfish  motives,  the  capital  levy  is  an 
attempt  to  transfer  the  burden  of  debt  from  the  large  number 
of  income-tax  payers  to  the  relatively  small  number  of  owners  of 
property. 

The  capital  levy  shifts  the  burden  from  earned  to  unearned 
income,  from  current  earnings  to  accumulated  surplus.  The  capital 
levy  bears  heavily  on  existing  productive  power.  The  income  tax, 
on  the  other  hand,  is  a  continuous  burden  levied  on  future  produc- 
tive power.  High  taxes  would  hamper  future  production,  but  a 
capital  levy  would  free  it  from  onerous  tax  burdens. 

ii.  Permanent  vs.  Maturing  Public  Debts 

In  England  and  in  France  before  the  war  it  was  considered 
sound  fiscal  policy  to  consolidate  the  term  debts  in  the  form  of 
a  perpetual  loan.      However,  the  burden  of  the  debts  now  out- 


488        INTERNATIONAL   FINANCE    AND   ITS    REORGANIZATION 

Standing  is  so  huge  that  this  traditional  policy  is  being  discarded. 
It  is  even  proposed  to  wipe  out  the  entire  debt  or  a  large  part  of 
it  in  a  single  operation.  On  the  other  hand  American  statesmen 
favored  a  policy  of  a  rapid  repayment  of  the  debt  and  followed 
such  a  policy  after  both  the  Revolution  and  the  Civil  War.  This 
policy  is  justified  by  the  fact  that  wars  have  occurred  throughout 
history  at  brief  intervals  and  it  is  therefore  a  measure  of  prudence 
for  a  government  to  be  in  sound  condition.  Furthermore,  with  the 
increasing  development  of  democratic  tendencies  the  social  demands 
upon  the  budget  will  become  greater  and  the  public  debt  charges 
must  not  be  permitted  to  hamper  the  sound  development  of  vigorous 
nations.-  The  theory  of  the  permanent  debt  is  based  on  the  eco- 
nomic fact  that  as  the  wealth  of  the  country  increases  the  relative 
burden  of  the  debt  decreases.  Furthermore,  to  tax  sufficiently 
heavily  to  repay  the  debt  may  interfere  with  the  processes  of  pro- 
duction. Yet  if  the  debt  is  held  by  comparatively  few  wealthy 
persons  and  the  taxes  paid  by  a  larger  number  it  may  constitute  a 
social  injustice. 

The  repayment  of  national  debts  extends  back  over  two  hundred 
years.  In  1715  the  public  debt  of  Great  Britain  amounted  to 
£50,000,000  and  the  annual  charge  to  about  £3,000,000.  The 
debt  had  doubled  in  about  thirteen  years  and  a  capital  levy  was 
being  urged  to  rid  the  country  of  the  debt.  As  a  counter  policy 
Robert  Walpole  introduced  plans  for  a  sinking  fund  and  in  ten 
years  almost  £7,000,000  of  the  debt  had  been  retired.  In  1786 
Pitt,  Chancellor  of  the  Exchequer,  presented  his  plan  for  a  sink- 
ing fund  to  pay  off  the  entire  public  debt  in  forty-five  years.  Pitt 
stated  his  policy  thus:  "In  all  operations  in  finance  we  should 
always  have  in  view  a  redemption.  Gradually  to  redeem  and  to 
extinguish  our  debt  ought  to  be  ever  the  wise  pursuit  of  Govern- 
ment. Every  scheme  and  operation  of  finance  should  be  directed 
to  that  end  and  managed  with  that  view."  A  sinking  fund  has 
been  operation  in  Great  Britain  for  over  a  century. 

Several  refunding  operations  have  enabled  Great  Britain  to 
reduce  the  interest  on  her  outstanding  public  debt.  In  1749  the 
4-per  cent  loans  were  reduced  to  a  3^ -per  cent  basis.  In  1784 
Pitt  funded  the  floating  debt  of  over  £18,000,000.     There  were 

°  Seligraan,  E.  R.  A.,  Fiscal  Reconstruction.  Chapter  in  American 
Problems  of  Reconstruction.  New  York,  E.  P.  Button  &  Co.,  1919,  3rd 
ed.,  p.  437-433. 


i 


THE   CAPITAL   LEVY   IN   GREAT  BRITAIN  489 

several  other  attempts  at  refunding,  the  most  successful  of  which 
was  the  operation  of  1888  and  1889  when  £565,000,000  3-per 
cent  bonds  were  refunded  into  2^-per  cent  consols.^ 

iii.   The  Levy  on  Wealth 

After  military  conscription  was  put  into  effect  in  Great 
Britain  the  demand  for  "a  conscription  of  wealth"  grew  in  impor- 
tance. At  the  beginning  of  19 18  the  War  Emergency  Workers 
National  Committee  advocated  "that  the  Government  ought  to 
accompany  the  conscription  of  men  by  the  conscription  of  wealth; 
that  a  suitable  measure  would  be  the  immediate  imposition,  in 
lieu  of  any  further  loans,  of  a  graduated  levy  on  all  capital  wealth 
on  the  basis  of  the  existing  death  duties."  The  question  was 
r?.ised  in  the  House  of  Commons  in  the  debate  on  the  budget  on 
the  23rd  of  April,  191 8.  Mr.  Bonar  Law,  then  Chancellor  of 
the  Exchequer,  stated  that  "the  question  of  whether  or  not  there 
should  be  a  conscription  of  wealth  is  entirely  a  matter  of  expediency, 
and  I  think  it  is  a  matter  that  concerns  mainly  not  the  working 
classes  but  the  people  who  have  money.  My  own  feeling  is  that 
it  would  be  better,  both  for  the  wealthy  classes  and  the  country, 
to  have  this  levy  on  capital  and  reduce  the  burden  of  the  national 
debt.  The  burden  should  rest  practically  on  the  wealth  that  has 
been  created  and  is  in  existence  when  the  war  comes  to  an  end 
so  that  it  would  not  be  a  handicap  upon  the  creation  of  new  wealth 
after  the  war." 

The  levy  on  wealth  has  been  proposed  in  two  forms.  The 
capital  levy  would  apply  to  all  wealth  regardless  of  when  or  how 
it  was  accumulated.  The  levy  on  war  wealth  would  apply  only 
to  wealth  gained  during  and  in  connection  with  the  war. 

C.  Principles  of  a  Capital  Levy 
i.  The  Problem  and  the  Proposed  Solution 

As  a  result  of  the  war  the  net  private  wealth  increased  from 
£12,500,000,000  to  £15,000,000,000  and  the  state  became  indebted 

'  Hirst,  F.  W,,  Credit  of  the  Nations,  pp.  26-39. 
Bastable,  C.  F.,  Public  Finance,  Book  V,  Chap.  III. 
Mill,  J.  S.,  Principles,  Book  V,  Chap  VII. 
Ricardo,  D.,  Principles,  Chap.  XVII. 
risk,  Harvey  E.,  English  Public  Finance,  pp.  121-3. 


49©        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

to  the  extent  of  about  £7,600,000,000.  Either  under  a  capital 
levy  or  under  income  taxation,  it  is  necessan^  to  set  ofE  the  public 
debt  against  private  wealth.  The  fiscal  problem  is  merely  to 
determine  which  is  the  most  suitable  means  of  accomplishing  this 
end.  A  levy  on  wealth  would  make  it  possible  to  draw  upon 
the  accumulated  surplus. 

The  levy  w^ould  not  have  to  be  paid  in  cash,  but  in  some  form 
of  capital.  Since  the  state  does  not  intend  to  pay  its  current 
expenses  out  of  the  levy,  but  rather  to  reduce  its  obligations,  either 
war  loans  or  other  securities  would  be  acceptable.  The  levy 
would  fall  on  the  individual  and  the  rate  w^ould  be  graduated  in 
accordance  with  the  extent  of  his  wealth.  The  levy  would  be 
applied  just  once,  not  repeatedly  at  intervals,  and  would  be  used 
for  canceling  part  of  the  public  debt. 

ii.  A  Levy  on  Intangible  Capital 

To  avoid  injustice,  the  advocates  of  a  levy  would  not  dis- 
criminate against  material  capital  in  favor  of  intangible  capital 
such  as  brain  power  or  personal  skill.  That  is,  they  would  assess 
not  merely  the  factory,  which  yields  profits,  but  the  brain  which 
produces  wages  or  fees.  The  value  of  intangible  capital  is  the 
present  value  of  an  annuity  equal  to  the  assessed  income  over  a 
period  of  j  ears  equal  to  the  individual's  expectation  of  life. 

The  levy  on  a  man's  mental  capital  would  be  in  the  form  of 
an  additional  annual  tax,  above  the  income  tax.  The  present 
value  of  this  annual  installment  during  the  actuarial  expectation  of 
life  should  equal  the  amount  of  the  levy.  The  annual  installment 
should  be  used  not  for  meeting  the  current  expenses  of  the  state, 
but  for  the  retirement  of  the  debt. 

iii.  A  Capital  Levy  Would  Supplement  the  Income  Tax 

Income  need  not  be  the  sole  basis  of  taxation  for  the  retirement 
of  the  public  debt.  Equal  incomes  do  not  imply  equal  ability  to 
pay.  For  two  pieces  of  property  may  be  of  equal  value  yet  one 
may  yield  a  very  low  income  at  present  and  have  large  returns 
deferred  in  the  future  after  the  redemption  of  the  debt,  whereas 
the  other  may  have  a  large  income  at  present,  which  may  decline 
or  even  vanish  in  the  future — before  the  redemption  of  the  debt. 
In  the  former  case  the  owner  could  evade  an  income  tax,  but  could 


THE    CAPITAL    LEVY    IN    GREAT    BRITAIN  49 1 

not  evade  a  capital  levy.  Non-income  producing  capital,  with 
prospects  of  appreciation  in  the  distant  future,  vi^ould  attract  funds 
whose  owner  seeks  to  avoid  high  post-war  income-taxes. 

However,  the  capital  levy  supplements  the  income  tax  not  only 
from  the  point  of  view  of  property.  From  the  point  of  view  of 
income,  two  individuals  with  equal  incomes  cannot  be  expected 
to  bear  the  same  levy  if  one  of  them  has  a  salary  from  terminable 
employment  and  the  other  has  an  income  from  capital  investments. 
The  differential  tax  on  unearu'^d  income  is  an  attempt  to  equalize 
the  burden. 

D.  Misconceptions  Concerning  the  Levy 

i.  Capital  Levy  is  not  a  New  Proposal^ 

A  capital  levy  was  urged  in  1 716  after  the  wars  of  Queen 
Anne's  reign  when  the  national  debt  had  increased  over  200  per 
cent.  The  agitation  for  a  levy  resulted  in  the  plan  for  a  sinking 
fund  to  retire  the  debt.  The  proposal  was  fathered  by  Hutchson, 
Asgill,  Barbier  and  Hook.  Ricardo  in  1820  in  his  "Essay  on  the 
Funding  System"  advocated  the  plan.  He  reasoned  that  until  it 
is  redeemed  a  large  debt  entails  a  charge  upon  income  in  the 
future  and  no  purpose  is  served  in  delaying  repayment.  His  plea 
for  a  "ransom"  was  subject  to  the  condition  that  the  extinction 
of  the  debt  should  not  be  followed  by  further  borrowing.  Or  the 
cancellation  of  the  war  debt  by  a  general  contribution  was  intended 
to  prevent  the  formation  of  a  new  debt.  In  1874  Menier,  the 
French  chocolate  maker,  advocated  the  conscription  of  wealth  in 
a  pamphlet  entitled  "L'impot  sur  le  capital."  After  the  Franco- 
Prussian  War,  a  capital  levy  was  proposed  by  Carayon-Latour  and 
Philippoteaux. 

Furthermore,  inheritance  taxes,  or  to  use  the  British  term, 
death  duties  are  a  form  of  capital  levy.  However,  they  do  not 
apply  to  the  entire  nation  at  the  same  time  but  only  to  the  estates 
of  the  deceased  of  any  one  year.  But  unlike  the  capital  levy 
death  duties  are  applied  not  to  the  redemption  of  the  capital 
liabilities  of  the  state,  but  to  current  expenses,  an  unwarranted 
form  of  prodigality.    The  difficulties  of  assessment  and  of  collec- 

*  Ricardo,  Collected  works,  McCuDoch,  ed.,  p.  149;  Mill's  Principles, 
Book  V,  Chap.  7,  Sec.  2. 


492        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

tion  which  have  been  urged  against  the  capital  lev}'  applj'  equally 
to  death  duties. 


ii.   Capital  Levy  is  not  Equivalent  to  Repudiation 

Repudiation  of  its  debt  would  not  solve  the  difficulties  of  a 
country.  Repudiation  would  constitute  a  breach  of  faith  and 
would  shatter  confidence  in  its  credit.  Again  repudiation  would 
arouse  international  hostility,  and  might  result  in  war  or  in  military 
preparations  which  would  amount  to  more  than  the  money  repudi- 
ated. Finally  repudiation  by  a  state  would  lead  to  the  bankruptcy 
of  the  holder  of  its  obligations.  Repudiation  is  illogical  and  unjust 
because  it  would  take  all  the  wealth  of  the  individual  who  loaned 
his  money  to  the  state,  while  leaving  in  full  possession  of  his 
wealth  the  individual  who  invested  his  war  profits  in  non-govern- 
ment bonds. 

But  the  capital  levy  is  not  equivalent  to  repudiation.  For 
example,  Mr.  A.  Bonar  Law,  the  former  Chancellor  of  the 
Exchequer,  who  favored  consideration  of  a  levy,  denounced  repudia- 
tion as  the  means  of  solving  the  problem  of  the  debt.  "The 
repudiation  of  state  liabilities  would  in  my  judgment  be  as  disastrous 
as  it  would  be  dishonorable.  Repudiation  spells  national  dishonor 
and  national  disaster.  .  .  .  Whatever  be  the  policy  of  the  British 
Government  after  the  war  with  reference  to  a  capital  levy  I  am 
certain  that  there  will  be  no  discrimination  in  favor  of  those 
who  have  withheld  their  money  from  the  state  at  a  time  when  its 
needs  were  greatest."  ^ 

There  are  several  points  of  difference  between  a  levy  on  capital 
and  repudiation.  A  capital  levy  will  fall  on  all  British  owners 
of  property  and  not  merely  on  investors  in  war  loans.  A  capital 
levy  will  not  affect  non-resident  foreign  owners  of  British  war 
debts.  The  limits  of  a  capital  levy  would  exempt  the  small 
property  owner.  Repudiation  would  not  spare  the  smallest  holder 
of  government  obligations.  Repudiation  is  a  breach  of  faith,  but 
the  capital  levy  is  not.  Repudiation  would  lead  to  extensive  bank- 
ruptcy, the  capital  levy  should  not. 

'  New  York  Times,  December  28,  1917. 


THE   CAPITAL  LEVY   IN   GREAT   BRITAIN  493 

E.  The  Method  of  Payment 

i.   The  Difficulty  of  Valuation 

(a)  The  Per  Cent  Assessable — 

Professor  Pigou  uses  the  returns  of  inheritance  taxes  for  the 
fiscal  year  19 14-15  and  concludes  that  about  70  per  cent  of  the 
total  property  of  the  United  Kingdom  passing  at  death  is  easily 
assessable,  including  securities,  money  on  mortgage,  insurance  poli- 
cies and  cash  and  bank  deposits.  Of  the  remaining  30  per  cent, 
16  per  cent,  including  house  property,  business  premises  and  agri- 
cultural land,  could  be  roughly  assessed  on  the  basis  of  existing 
income-tax  returns.  On  the  remaining  14  per  cent,  such  as  trade 
assets,  good-will,  household  goods,  and  miscellaneous  property,  a 
tentative  assessment  could  be  made  subject  to  revision  under  the 
inheritance  tax  upon  their  transference  to  heirs.  Evasion  would 
hardly  be  more  undetectable  under  the  capital  levy  than  under 
income  and  inheritance  taxes. 

(b)  Method  of  Valuation — 

The  valuation  of  wealth  would  be  made  not  by  a  board  of 
assessors,  but  by  the  taxpayer  himself  as  in  the  case  of  the  income 
tax.  The  detailed  returns  of  income  taxes,  would  furnish  the  tax 
authorities  with  a  means  of  checking  the  taxpayers'  valuation. 

Of  course,  exact  valuation  is  not  attainable.  There  must  be 
differences  in  the  degree  of  accuracy  in  assessing  various  properties. 
Errors  in  valuation  would  be  detected  by  subsequent  official  audit- 
ing of  returns,  and  deliberate  fraud  would  be  checked  by  adequate 
penalties.  Stock-exchange  securities  and  even  unlisted  securities 
for  which  there  is  a  market  may  be  easily  assessed.  Securities  of 
closed  corporations  would  be  valued  by  their  directors  under  uni- 
form regulations.  Real  property,  always  difficult  to  appraise,  may 
be  assessed  for  the  purpose  of  the  capital  levy  on  the  basis  used 
in  estate  duties.  Such  difficulties  as  might  be  met  would  be  no 
more  serious,  say,  than  the  difficulties  in  securing  income-tax  returns 
from  farmers. 

ii.  Graduation  and  Assessment 

The  principles  that  apply  in  income-tax  assessments  apply  here 
as  well.     Individuals,  owning  properties  of  little  value  should  be 


494        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

exempt  from  the  levy  and  rates  should  be  graduated  so  to  increase 
proportionately  with  the  worth  of  the  property.  F.  W.  Pethick 
Lawrence  has  calculated  the  graduations  in  rates  that  would  be 
required  to  wipe  out  var>^ing  fractions  of  the  total  national  debt. 
To  raise  £900  million,  capital  below  £200  would  be  exempt  and 
the  rates  would  rise  from  i  per  cent  for  the  part  of  capital  between 
£200  and  £500  up  to  ii  per  cent  for  the  part  of  capital  between 
£500,000  and  £1,000,000.  To  raise  £1,800  million,  capital  below 
£150  would  be  exempt  and  the  rates  would  rise  from  I  per  cent 
for  the  part  of  capital  between  £150  and  £200  to  5  per  cent  for 
the  part  of  capital  between  £750  and  £1,000,  and  to  II  per  cent 
for  the  part  of  capital  between  £7,500  and  £10,000.  To  wipe 
out  the  entire  debt  of  about  £7,500  million,  the  rates  in  the  second 
table  would  have  to  be  multiplied  by  about  four. 

iii.  Form  of  Payment 

The  basic  principle  applicable  in  considering  the  method  of 
payment  is  that  not  cash  but  a  form  of  capital  would  be  wanted. 
There  are  three  groups  of  capital  which  would  be  acceptable.  The 
first  consists  of  securities  which  the  state  would  wish  to  obtain 
and  perhaps  to  keep,  for  example,  long-term  and  short-term  govern- 
ment obligations,  high-grade  foreign  and  colonial  securities,  and 
shares  or  bonds  in  British  railways,  banks  or  industries.  Govern- 
ment obligations  would  be  canceled  on  receipt,  and  thus  directly 
reduce  the  public  debt.  Foreign  and  colonial  obligations  might  at 
a  favorable  occasion  be  exchanged  for  foreign  holdings  of  internal 
war  loans  or  for  war  loans  floated  aboard.  Securities  in  British 
enterprises  might  be  held  for  their  income  to  meet  interest  on  the 
public  debt  or  else  may  become  part  of  the  permanent  property  of 
the  state.  The  second  group  of  securities  includes  those  which  the 
state  would  hold  for  the  sake  of  the  income  derived  from  them, 
such  as  industrial  stocks  and  bonds,  interest  in  land,  and  interest 
in  industrial  companies  or  firms.  Eventually  these  would  be  sold 
to  par  off  the  foreign  or  domestic  debt  or  to  purchase  securities 
of  the  first  group.  The  third  group  consists  of  other  forms  of 
wealth,  such  as  liens  on  property,  bearing  interest  and  redeemable 
at  the  option  of  the  taxpayer. 

Individuals  who  had  bought  more  heavily  of  war  loans  than 
their  pro-rata  share  of  the  capital  levy  would  sell  their  war  bonds 


THE  CAPITAL  LEVY  IN  GREAT  BRITAIN  495 

to  the  government  and  receive  in  exchange  securities  which  the 
government  would  obtain  from  those  who  bought  less  than  their 
share  of  war  loans.     Forced  sales  would  thus  be  obviated. 

To  induce  the  holders  of  war  bonds  to  transfer  them  to  the 
government,  a  slight  premium  above  the  market  quotation  might 
be  paid.  To  realize  on  other  securities  the  Treasury  might  issue 
lists  of  quotations  such  as  were  published  by  the  Dollars  Securities 
Committee  during  the  war.  These  might  be  held  by  the  govern- 
ment for  their  income  and  the  depositors  of  these  securities  might 
have  the  option  of  redeeming  them  through  the  payment  of  an 
equivalent  amount  of  war  loan.  It  should  not  be  necessary  to 
resort  to  forced  sales. 

Again  to  avoid  extensive  selling  of  securities,  capital  levy  pay- 
ments could  be  made  in  installments  out  of  income  or  through  the 
us  of  credit  facilities.  For  example,  the  farmer  might  give  the  state 
a  mortgage  on  his  land,  and  then  by  installment  payments  liquidate 
the  mortgage.  In  the  meantime  the  state  could  apply  the  income 
from  the  mortgage  toward  interest  on  the  war  loan.  Finally, 
some  persons  might  prefer  to  pay  their  assessments  under  the 
capital  levy  out  of  cash  on  deposit  at  the  bank  or  out  of  savings. 
To  facilitate  payment  in  slightly  marketable  securities  or  in  real 
property,  special  institutions  might  be  created,  like  the  war-time 
Darlehnskassen  in  Germany,  to  grant  credit  and  thus  to  enable 
the  taxpayer  to  pay  in  cash.  The  small  number  of  persons  who 
could  not  meet  the  capital  levy  by  any  one  of  the  above  three 
methods  should  then  have  the  option  of  paying  in  installments,  a 
sort  of  special  income  tax.  Peculiar  difficulties  might  be  referred 
to  a  commission  which  would  function  through  representatives  who 
are  familiar  with  local  conditions. 

iv.  Evasion 

Evasion  of  the  capital  levy  could  be  reduced  by  checking  the 
taxpayers'  assessment  against  the  returns  on  income  and  property 
taxes.  Evasion  would  be  temporary  in  many  cases,  for  the  inherit- 
ance taxes  would  reveal  the  true  value  of  doubtful  assets.  On 
the  other  hand,  if  the  rich  hoped  to  escape  the  capital  levy  by 
buying  non-income  producing  goods,  such  as  jewelry,  the  prices 
of  these  commodities  would  rise  before  the  levy,  would  fall  after 
the  levy,  and  the  fall  would  thus  constitute  a  form  of  capital  levy. 


496        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Similarly  the  attempt  to  dodge  the  levy  by  the  purchase  of  bearer 
bonds  would  tend  to  increase  their  price  and  lower  their  yield 
and  would  thus  constitute  a  form  of  levy. 

F.  Advantages  and  Benefits  Expected  of  a  Levy 

As  a  result  of  the  levy  the  aggregate  real  wealth  of  the  country 
would  remain  unchanged.  However,  its  distribution  would  be 
changed,  for  the  very  wealthy  would  have  their  assets  reduced. 
The  state  would  reduce  its  liabilities,  and  the  annual  debt  charges 
would  therefore  be  decreased  or  eliminated.  The  floating  debt 
causes  inflation,  either  by  increasing  government  deposits  or  by 
forming  the  basis  of  private  loans  at  the  banks.  Its  elimination 
would  produce  deflation.  Cancellation  of  part  of  the  debt  out  of 
savings  would  have  a  similar  result.  A  capital  levy  would  enable 
Great  Britain  to  reduce  its  floating  debt,  which  can  be  handled 
only  with  great  difficulty  and  thus  tends  to  depress  the  price  of  war 
loans  as  well  as  industrial  securities  and  to  reflect  upon  soundness 
of  public  and  private  credit. 

The  capital  levy  would  lower  the  rate  of  interest  on  new 
capital  and  would  raise  the  value  of  depreciated  securities.  War- 
time borrowing  called  for  large  amounts  of  money,  rates  of  interest 
rose,  and  the  value  of  then  existing  securities  was  depressed.  The 
depreciation  of  outstanding  securities  as  the  result  of  war-time 
borrowing  constitutes  a  disguised,  unjust,  and  indiscriminate  levy, 
which  would  be  undone  by  a  public  capital  levy  based  on  ability 
to  pay.  The  high  rate  of  interest  prevailing  after  the  war  is 
detrimental  to  the  restoration  of  industry  and  trade,  and  to  the 
progress  of  social  legislation. 

The  capital  levy  would  also  make  it  possible  to  wipe  out  the 
foreign  debt,  to  rectify  exchange  rates,  and  in  turn  to  help  restore 
the  trade  balance.  For  not  only  does  the  interest  charge  on  the 
foreign  debt  constitute  an  invisible  debt  in  the  foreign-trade  bal- 
ance, but  as  a  result  of  inflation  and  of  high  prices  the  invisible 
credit  balance  of  Great  Britain  can  purchase  less  goods  than  it 
did  before  the  war.  After  a  capital  levy,  prices  would  fall,  and 
the  invisible  credit,  shipping  charges  and  banking  fees,  would 
support  a  larger  volume  of  net  merchandise  imports. 

Finally,  if  a  capital  levy  is  not  put  into  effect,  the  only  alterna- 
tive method  of  handling  the  public  debt  will  be  through  high 


THE    CAPITAL    LEVY    IN    GREAT    BRITAIN  497 

income  taxes,  which  will  tend  to  repress  energy  and  effort  and 
will  fall  particularly  on  current  contributions  to  wealth.  On  the 
other  hand  if  the  capital  levy  is  put  into  effect  it  will  settle  the 
old  accounts  and  leave  the  future  free  from  burdensome  taxation. 

G.  Objections  to  the* Capital  Levy 

i.   The  Analogy   to  Military   Conscription  Erroneous 

The  advocates  of  the  capital  levy  justify  it  on  the  grounds 
that  military  conscription  took  the  lives  of  the  young  and  that 
the  conscription  of  wealth  will  call  for  an  equitable  sacrifice  on 
the  part  of  the  old  men  to  compensate  for  exemption  from  military 
service.  But  the  underlying  assumption  is  wrong.  The  distinction 
is  not  true  to  fact.  Many  of  the  young  who  fought  have  con- 
siderable property  and  men  of  mature  years  were  in  the  military 
service.  Again,  if  the  old  men  themselves  did  not  fight,  their  sons 
did.  Besides,  the  widows  and  orphans  of  those  that  made  the 
supreme  sacrifice  would  have  to  make  the  second  sacrifice  involved 
in  the  capital  levy. 

Equality  of  taxation  or  equality  of  sacrifice  as  stated  by  econ- 
omists can  be  used  only  in  the  financial  sense — two  individuals  or 
two  properties  of  like  worth  should  bear  equal  burdens.  But  it  is 
a  misapplication  of  the  concept  to  attempt  to  measure  the  sacrifice 
of  life  or  limb  in  monetary  terms.  The  opponents  of  the  capital 
levy  deny  the  equity  of  such  a  plea. 

ii.    The  Self-Corrective  Nature  of  a  Heavy  Debt 

A  heavy  debt  has,  temporarily  at  least,  certain  advantages,  for 
it  curtails  public  extravagance  and  checks  private  expenditure.  It 
was  the  heavy  burden  of  post-war  taxation  in  the  United  States 
that  prevented  the  passage  of  a  bill  to  provide  bonuses  for  soldiers 
who  were  not  incapacitated  and  who  had  never  even  been  overseas. 
A  heavy  debt  is  a  reminder  of  the  costliness  of  war  and  tends  to 
check  the  military  party  of  the  several  governments.  The  excel- 
lent pre-war  fiscal  condition  of  Germany  in  191 4  reenforced  the 
arguments  of  its  militarists  in  favor  of  precipitating  war. 

If  a  capital  levy  were  to  be  put  into  effect  it  should  be  possible 
greatly  to  reduce  the  income-tax  rate,  below  the  war-time  level, 
providing  no  other  new  expenditures  were  developed.     The  great 


498        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

reduction  in  the  tax  rate,  however,  would  be  an  incentive  to  legisla- 
tive bodies  to  careless  public  expenditure. 

iii.   Taxation,   a  Preferable  Solution 

(a)  High  Taxes  are  Accepted  Facts — 

The  country  became  accustomed  to  high  rates  of  taxation  dur- 
ing the  war,  and  these  rates  are  now  accepted  and  are  uncom- 
plainingly borne.  It  is  contended  that  high  income  taxes  deter 
saving.  A  capital  levy,  however,  would  have  the  same  effect  for 
it  would  introduce  the  element  of  insecurity  which  would  vitiate 
the  admitted  value  of  subsequent  low  taxes  in  inducing  saving. 
During  the  war  the  country  raised  by  taxation  not  only  the  interest 
on  the  growing  debt,  but  also  a  substantial  portion  of  its  war 
expenses.  After  the  war,  it  should  not  be  very  difficult  to  secure 
by  taxation  sufficient  revenue  to  pay  the  interest  on  that  debt. 

The  proponents  of  a  capital  levy  maintain  that  high  income 
taxes  would  injure  industry.  But  this  argument  is  not  valid. 
Such  taxes  as  fall  on  production  may  repress  it,  but  taxes  on  con- 
sumption and  taxes  on  persons  would  not  necessarily  have  this 
effect.  Again  heavy  taxation  may  have  the  effect  of  stimulating 
activity  upon  the  part  of  those  who  desire  to  maintain  pre-war 
standards  of  living,  and  must  work  harder  to  do  so.  Although 
high  taxes  may  diminish  the  net  return  of  the  individual  manu- 
facturer, yet  money  is  not  the  sole  motive  in  business  activity.  The 
joy  of  achievement  is  an  important  factor.  Moreover,  the  relative 
position  of  the  individual  in  the  community  and  not  the  absolute 
amount  of  his  wealth  is  an  incentive  to  effort.  The  imposition  of 
a  heavy  income  tax  affects  all  incomes  and  does  not  greatly  modify 
the  relative  financial  standing  of  two  taxpaj'ers  in  the  community. 
And  finally  the  present  income  tax  has  not  checked  saving  in  the 
past  although  surplus  funds  have  been  taxed  twice,  once  as  earned 
income  and  again  as  unearned  income  or  interest  and  dividends. 

(b)  The  Tax  Burden  Inevitably  Declines — 

The  opponents  of  the  capital  levy  point  out  that  there  is  no 
need  for  it  since  the  burden  of  annual  taxation  tends  to  decline 
for  a  number  of  reasons.  As  the  resources  of  the  country  are 
developed,  and  as  production  and  the  national  income  increase, 
the  waste  of  war  is  replaced,  the  demand  for  capital  declines,  and 


THE    CAPITAL    LEVY    IN    GREAT    BRITAIN  499 

the  supply  increases.  Interest  rates  fall.  It  then  becomes  possible 
to  refund  the  loan  at  a  lower  rate  of  interest.  The  rate  of  taxation 
required  to  meet  the  charges  on  the  public  debt  may  be  lowered. 
If  interest  rates  fall,  and  tax  rates  are  maintained,  it  then  becomes 
possible  to  redeem  the  debt  out  of  tax  revenues,  through  the 
operation  of  a  sinking  fund.  The  financial  history  of  Great  Britain 
after  the  Napoleonic  Wars  illustrates  these  movements. 

The  effectiveness  of  this  argument  of  the  opponents  of  the 
capital  levy  is  admitted  by  its  advocates,  who  contend  that  the 
fiscal  problem  is  not  a  matter  of  the  distant  future  but  a  question 
of  the  years  immediately  following  the  war. 

(c)    The  Capital  Levy  as  a  Form  of  Income  Tax — 

Since  the  capital  levy  must  take  the  equivalent  of  the  capital 
value  of  the  high  income  taxes  which  it  replaces,  there  is  nothing 
to  be  gained  thereby.  Again  there  would  be  cases  in  which  the 
capital  levy  would  be  paid  in  annual  installments  out  of  income, 
as  in  the  amortization  by  the  owner  of  a  state  lien  on  private 
property  or  in  the  settlement,  out  of  annual  income,  of  the  levy  on 
intangible  capital,  and  therefore  the  capital  levy  would  really 
become  an  income  tax  in  form.  The  German  and  Italian  capital 
levies  are  pa3'able  in  installments. 

Since  intangible  capital  must  meet  the  levy  out  of  income  in 
addition  to  the  regular  income  tax,  all  the  argum^ents  against  high 
income  taxes  and  in  favor  of  the  capital  levy  must  fall.  If  this 
annual  installment  on  account  of  the  capital  levy  is  too  steep,  it 
will  deter  future  effort.  In  fact  the  installment  payment  defeats 
the  very  object  of  the  levy,  which  is  to  wipe  out  part  of  the  debt 
at  once  while  prices  are  high.  Payment  by  installment  is  not  only 
contrary  to  the  principle  of  the  capital  levy  but  it  is  an  economically 
faulty  method,  for  it  commits  the  taxpayer  to  a  series  of  payments 
in  the  future  based  upon  a  valuation  at  a  particular  moment.  It 
is  more  than  likely  that  the  capital  valuation  would  change  as 
well  as  the  annual  income  out  of  which  installment  payments 
would  be  met. 

iv.  Capital  is  More  Productive  in  Private  Hands 

If  capital  is  left  in  private  hands  it  will  be  more  productive 
than  if  the  state  takes  it  over  by  a  levy.     For  the  individual  works 


500        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

under  incentives  which  the  state  lacks.  As  a  result  a  loss  is 
incurred  by  taking  capital  instead  of  leaving  it  in  private  hands. 
The  capital  levy  takes  the  principal  itself,  whereas  taxes  take  only 
a  part  of  the  profits.  If  the  state  levies  on  property  it  must  either 
sell  the  assets  and  inevitably  unsettle  the  sensitive  market  for 
securities  or  else  the  state  must  operate  the  property  and  will  do  so 
less  efficiently. 

There  is  a  fundamental  defect  inherent  in  the  capital  levy.  If 
the  public  debt  is  allowed  to  stand,  the  rate  of  interest  which  the 
state  must  pay  on  its  bonds  is  with  respect  to  the  private  rate  rela- 
tively low  and  therefore,  the  tax  upon  the  national  income  is  cor- 
respondingly low.  But  if  as  a  result  of  the  capital  levy  the  public 
debt  in  part  is  offset  by  state-held  mortgages  on  private  property 
(whose  owners  had  less  of  war  loans  than  their  pro-rata  share  of 
the  capital  levy  required),  then  the  interest  payable  under  a  capital 
levy  on  the  state-held  mortgage  would  be  higher  than  the  income 
tax  payable  (by  the  owners  of  the  property),  to  meet  interest  on 
war  loans  if  the  levy  were  not  put  into  effect.  The  difference 
between  the  income  tax  rate  necessary  to  meet  the  charges  on  an 
existing  war  debt  and  the  rate  of  interest  payable  on  the  state-held 
mortgage  under  a  capital  levy  may  bankrupt  many  undertakings  in 
a  period  of  business  depression,  or  at  any  time  those  undertakings 
which  are  operating  on  a  close  margin  of  profit. 

v.   The  Fear  of  a  Repetition  of  a  Capital  Levy 

The  more  successful  the  first  capital  levy,  the  greater  would 
be  the  danger  of  its  repetition.  It  is  idle  for  its  advocates  to  give 
assurances  that  it  will  not  be  repeated,  for  they  admit  that  "no 
Parliament  can  bind  its  successors."  Therefore,  the  exemption  of 
future  savings  from  a  capital  levy  is  meaningless,  and  the  initial 
capital  levy  would  check  future  private  economy.  The  occasion 
for  the  repetition  of  a  capital  levy  might  be  either  to  pay  off  the 
balance  of  the  debt,  if  the  original  levy  should  dispose  of  only  a 
portion  of  it,  or  else  it  might  be  used  to  meet  growing  public  ex- 
penditures. In  either  event  a  repetition  would  deter  thrift  and 
restrict  production  in  the  future,  in  which  case  its  advantage  over 
a  high  income  tax  would  cease  to  exist. 

The  fear  of  the  repetition  of  the  capital  levy  might  lead  to  an 
insecurity  and  lack  of  confidence  in  the  British  investment  market. 


THE   CAPITAL   LEVY   IN   GREAT   BRITAIN  50r 

London  has  been  the  financial  capital  of  the  world.  It  might 
cease  to  be  so  when  its  prestige  should  be  shaken  by  striking 
departures  in  economic  practices.  Foreign  capital  might  cease  to 
flow  into  British  markets  and  British  capital  itself  might  seek  the 
shelter  of  governments  which  are  either  in  less  dire  financial  straits 
or  else  are  less  willing  to  undermine  their  credit  reputation. 

Finally  there  is  danger  of  a  continuous  repetition  until  all 
capital  would  be  destroyed.  It  is  an  axiom  of  taxation  that  a 
productive  source  of  revenue  once  developed  rarely  remains  unused. 
The  graduated  income  tax,  originally  a  war  measure,  was  continued 
under  peace  conditions. 

vi.  Administrative  Difficulties 

The  attempt  to  set  off  private  wealth  against  the  liabilities  of 
the  state  is  fraught  with  all  sorts  of  administrative  difficulties. 
If  special  inducements  are  offered  that  holders  of  the  war  loan  may 
turn  in  their  bonds,  the  cost  to  the  government  of  the  levy  is 
raised.  Again  property  surrendered  in  lieu  of  a  war-loan  bond 
would  have  to  be  assessed  and  might  be  unacceptable  to  individ- 
uals holding  a  surplus  of  war-loan  bonds  which  the  governraent 
would  desire  to  trade  for  private  property. 

(a)    Capital  not  as  Definite  a  Basis  as  Income — 

Income  as  the  basis  of  taxation  is  a  definite  and  readily  as- 
certainable sum,  the  accuracy  of  v^^hich  may  be  checked  from  former 
income-tax  records.  Capital  is  not  ascertainable  so  easily.  At 
best  it  can  only  be  estimated  and  not  easily  checked.  Furthermore, 
if  the  capital  levy  is  spread  in  installments  over  a  long  period  of 
time,  annual  payments  for  ten  to  thirty  years  are  based  on  an 
untrustworthy  asse:^sment  at  a  particular  moment.  Difficult  as  is 
the  valuation  of  material  capital,  that  of  intangible  capital  would 
be  more  so.  The  estimates  of  intangible  capital  based  on  actuarial 
mortality  tables  would  be  subject  to  frequent  revision.  If  a 
professional  man's  earnings  declined  he  might  have  to  stop  paying 
his  annual  instalment.  If  his  earnings  rose  it  would  be  necessary 
to  revise  the  valuation  of  intangible  capital. 

The  difficulties  in  appraising  capital  are  illustrated  by  the 
failure  of  the  land-valuation  scheme  which  was  urged  upon  Great 
Britain  in  1909-10  by  Lloyd  George.    A  large  part  of  the  valua- 


S02         INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

tions  have  been  set  aside  by  the  courts  and  the  work  of  the  assessors 
has  been  characterised  by  Austen  Chamberlain,  Chancellor  of  the 
Exchequer,  as  follows: 

"To  a  very  large  extent  they  are  valuations  of  metphysical 
transactions  arrived  at  by  elaborate  mathematical  calculations  that 
nobody  but  an  expert  can  make  and  as  to  which  the  layman  may 
doubt  sometimes  whether  the  expert  himself  even  understands 
them." 

(b)  A  Large  Percentage  of  British  Property  Difficult  to  Assess — 

Professor  Pigou,  a  prominent  advocate  of  the  capital  lev>', 
estimates  that  from  13  to  20  per  cent,  of  the  total  British  private 
property  would  be  difficult  to  value. ^  On  the  other  hand  J.  C. 
Stamp,  one  of  the  leading  statisticians  of  Great  Britain,  in  an  un- 
partisan  presentation  says  that  "upon  a  rough  analytical  estimate 
probably  55  per  cent,  of  the  total  would  be  susceptible  of  close 
or  approximate  valuation  upon  readily  available  lines  (e.g., 
mortgages  and  loans  fixed  in  amount  and  fully  secured  ground 
rent,  and  secured  investment  income  subject  to  market  quotations), 
and  the  balance  of  45  per  cent,  (e.g.,  marginal  values  of  property 
less  its  charges,  ordinary  shares,  personal  property,  etc.)  would 
necessarily  constitute  the  real  crux  of  the  practical  problem."^ 

(c)  The  Adjustment  of  Errors — 

Owing  to  the  complexity  of  the  task,  the  numerous  doubts, 
the  lack  of  experience  with  previous  similar  taxes,  a  huge  number 
of  errors  would  have  to  be  audited  by  the  state.  This  would 
involve  a  gigantic  task  and  the  maintenance  of  a  large  staff.  The 
arrears  of  hundreds  of  millions  of  excess-profits  taxes  resulting 
from  the  auditing  of  the  tax  returns  indicate  some  of  the  difficulties 
of  administering  the  capital  levy.  It  has  been  suggested  that 
tentative  returns  be  made  and  that  the  final  adjustment  be  post- 
poned. Pending  the  readjustment  a  fixed  rate  of  interest  would 
be  charged  for  the  use  of  unpaid  taxes.  But  the  fixing  of  a  low 
rate  would  induce  the  taxpayer  to  undervalue  his  returns  and  a 
high  rate  might  saddle  the  state  with  the  interest  on  overpayment. 

'  Economic  Journal,  xxvlii.  no:  p.  149,  June,  1918. 
'Economic  journal,  xxvi.   in:  p.  286,   Sept.,   1918. 


THE   CAPITAL   LEVY   IN    GREAT   BRITAIN  503 

(d)  Fraud  and  Evasion — 

The  temptation  to  fraud  In  the  case  of  the  capital  levy  would 
be  great  for  the  amount  involved  would  be  very  large,  representing 
a  substantial  portion  of  a  life's  savings.  Taxes  on  annual  income 
are  less  likely  to  be  evaded.  But  the  capital  levy  would  be 
declared  just  once  and  there  would  not  be  the  annual  check  on 
fraud  through  successive  returns  as  in  the  case  of  the  income  tax. 

vii.   The  Capital  Levy  a  Panacea  which  Delays  the  Real  Remedy 

The  capital  levy  is  held  up  as  a  panacea  to  cure  the  fiscal 
ills  of  a  debt-laden  country.  To  the  extent  that  it  absorbs  the 
thought  of  the  country,  it  diverts  attention  from  the  basic  principle 
of  fiscal  reconstruction,  that  only  by  producing  more  and  con- 
suming less,  by  working  and  saving,  can  the  surplus  depleted  by 
war  be  restored. 

To  the  extent  that  the  capital  levy  is  workable,  a  variation 
of  it  is  in  effect.  Under  an  inheritance  tax,  the  heir  cannot  get 
possession  of  the  estate  without  the  consent  of  the  state  and  the 
transfer  of  the  property  from  the  deceased  to  his  successor  is  a 
much  more  public  fact  than  the  continued  possession  of  property.^ 

A  form  of  capital  levy  affecting  owners  of  securities  is  already 
in  effect,  for  the  depreciating  of  outstanding  securities  has  been  a 
continuous  process  since  the  beginning  of  the  war.  The  average 
price  of  British  consols  declined  from  74.9  in  1914  to  55.0  in  1919, 
a  fall  of  26^  per  cent.  Similarly  the  low  price  of  the  Bank  of 
England  stock  declined  from  234  in  191 4  to  186  in  1 91 9,  a 
depreciation  of  about  20^^  per  cent. 

The  monthly  average  value  of  387  representative  British 
securities  compiled,  declined  from  £3370  million  in  July,  1914 
to  £2634  million  in  June,  19 1 8,  or  22  per  cent,  and  In  December 
1920  to  £2320  million,  or  about  31  per  cent.^° 

This  depreciation  of  securities  should  satisfy  those  that  seek 
to  have  the  rich  deprived  of  their  property.  Furthermore,  the 
graduated  income  tax  can  accomplish  this  end  as  well  as  a  capital 
levy. 

'Mitchell,  A.  A.,  A  Levy  on  Capital.  Economic  Journal,  Sept.,  1918, 
p.   274. 

'"English  Public  Finance,  p.  218-220,  and  Bankers  Magazine,  Aug., 
1914,  July,    1918   and   Jan.,   1921. 


504        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

H.  Objections  Answered 
i.   The   Ethical  Objection 

(a)  The  Capital  Levy  is  Unjust — 

The  opponents  of  the  capital  levy  maintain  that  it  is  neither 
just  nor  equitable.  However,  no  tax  can  be  perfectly  just.  Nor 
is  the  capital  levy  less  equitable  than  the  steeply  graduated  income 
tax.  If  governments  were  limited  to  taxes  which  were  fair  to 
everyone,  adequate  revenue  would  be  impossible  to  obtain.  The 
urgent  need  for  funds  is  as  important  a  consideration  as  the  desire 
for  absolute  fairness. 

(b)  The  Capital  Levy   Constitutes  a  Breach  of  Faith — 

The  state  permitted  or  encouraged  the  accumulation  of  capital 
on  the  implied  promise  of  protection.  The  whole  theory  of  savings 
is  based  on  the  safety  of  property.  It  is  said,  therefore,  that  a 
capital  levy  would  constitute  a  breach  of  faith  on  the  part  of 
the  state  and  would  be  the  beginning  of  the  end  of  private 
property.  But  opponents  of  the  capital  levy  overlook  the  fact  that 
every  social  advance  in  the  past  has  constituted  an  abridgment  of 
the  rights  of  the  individual  and  an  enlargement  of  the  rights  of 
the  community.  The  break  with  tradition  is  the  mark  of  a  pro- 
gressive society. 

(c)  The  Levy  on  Capital  is  Discriminatory — 

It  is  held  that  the  levy  on  capital  would  plunder  the  rich. 
But  it  would  not  do  so  any  more  that  the  graduated  income  tax. 
Again  it  is  held  that  the  levy  is  an  added  tax  on  unearned  incomes. 
However,  the  levy  would  apply  to  all  property,  non-income  bear- 
ing as  well  as  income  bearing.  Finally  the  opponents  of  the  levy 
say  that  it  is  unfair  to  exempt  large  incomes,  derived  from  brain 
power  and  intangible  capital,  while  small  properties  are  taxed. 
The  answer  is  that  intangible  capital  may  be  subjected  to  a  levy 
by  capitalizing  the  actuarial  life  value  of  the  annual  income.  On 
the  other  hand,  below  a  reasonable  limit,  small  accumulations  of 
capital  would  be  exempt. 


THE   CAPITAL   LEVY    IN    GREAT    BRITAIN  50$ 


ii.   The  Economic  Objection 

(a)  The  Levy  JVill  Harm  Industry  and  Commerce^—' 

It  is  said  that  business  men  would  be  unable  to  pay  the  levy 
without  facing  ruin.  However,  since  it  would  not  be  necessary  to 
pay  in  cash,  the  business  man  might  mortgage  his  property  to 
meet  the  capital  levy  and  either  pay  the  proceeds  to  the  state  or 
else  pay  off  his  mortgage,  if  held  by  the  state.  The  interest  on  his 
mortgage  need  not  be  much  greater  than  the  amount  of  his  income 
tax  would  be  if  there  were  no  levy. 

The  opponents  of  the  levy  say  that  it  would  drive  capital  out 
of  the  country,  and  would  destroy  the  international  position  of 
London.  However,  the  tax  might  be  made  retroactive  as  of  a 
certain  date  so  that  money  could  not  leave  the  country  to  escape 
the  levy.  Again  the  countries  of  refuge  for  money  escaping  the 
capital  levy  would  be  few  in  number  for  where  the  levy  is  not 
laid  income  taxes  are  very  likely  to  be  high. 

(b)  The  Levy  Will  Deter  Saving  and  Foster  Extravagance — 

The  argument  runs  that  a  levy  would  discourage  saving. 
But  high  income  taxes,  which  would  have  to  be  imposed  in  the 
absence  of  the  levy,  would  also  check  savings.  Furthermore  in 
the  upper  groups  a  levy  will  not  check  savings  because  there  is 
an  automatic  surplus  of  income  above  even  high  standards  of 
living.  Again  it  is  less  likely  that  a  capital  levy,  which  would  be 
applied  just  once,  would  repress  savings  as  much  as  an  annual 
income  tax  with  high  rates.  As  a  matter  of  fact  the  capital  levy 
should  be  followed  by  a  period  of  low  income  tax  rates,  which 
in  turn  would  encourage  saving. 

It  is  said  that  a  capital  levy  would  be  a  penalty  on  thrift  and 
lead  to  extravagance.  The  argument  is  not  valid  because  all  taxa- 
tion is  a  penalty  on  thrift.  People  can  escape  this  penalty  by  not 
working.  A  capital  levy  would  not  lead  to  extravagance  any 
more  than  does  the  inheritance  tax,  a  modified  form  of  the  capital 
levy.  The  impulse  to  achievement  and  position  in  the  community 
is  not  checked  by  the  fact  that  at  death  a  large  part  of  the 
income  of  the  decedent  is  to  be  taken  from  him.  The  capital 
levy  would  probably  have  as  little  effect  in  fostering  extravagance. 


S06        INTERNATIONAL   FINANCE   AND   ITS    REORGANIZATION 

iii.   The  Administrative  Objection 

The  opponents  of  the  levy  point  out  the  difficulties  of  assess- 
ment and  the  likelihood  of  evasion.  However,  the  w^ar  has  left  a 
huge  debt  and  big  problems  in  the  solving  of  which  there  must 
needs  be  difficulties.  Evasion  and  understatement  maj'  be  checked 
through  other  tax  records.  Indeed  dodging  of  the  capital  levy 
need  not  be  undetectable. 

It  is  said  that  the  capital  levy  is  impracticable  because  it  would 
lead  to  a  panic  on  the  stock  market  when  securities  would  be 
liquidated  to  meet  the  levy.  However,  the  levy  would  not  be 
paid  in  money,  but  in  securities  of  various  kinds.  Again  the 
opponents  of  the  levy  affirm  that  the  state  would  be  unable  to 
pianage  the  property  taken  over  in  settlement  of  the  levy.  But 
the  state  would  not  have  to  manage  it,  for  most  property  is  in  the 
corporate  form  and  the  state  can  hold  shares  as  well  as  an  in- 
dividual can. 

iv.   The  Danger  of  Repetition 

The  opponents  of  the  capital  levy  maintain  that  if  it  is  likely 
to  fail  it  should  not  be  tried,  and  if  it  is  likely  to  succeed  there 
is  danger  of  its  repetition  and  of  the  final  abolition  of  private 
property.  However,  the  decision  to  repeat  the  levy  rests  with  the 
people  and  with  their  representatives.  Not  only  the  capital  levy 
but  the  whole  problem  of  government  is  dependent  upon  the 
common  sense  and  the  judgment  of  the  people.  They  must  be 
trusted  to  act  cautiously  and  justly.  Judgment  and  common 
sense  would  determine  whether  or  not  the  capital  levy  would  be 
repeated. 

I.  The  War  Wealth  Levy 

i.   The  Justification  of  the  War-Wealth  Levy 

The  war-wealth  levy  is  justified  on  the  ground  that  if  the 
war  had  been  scientifically  financed  there  would  be  no  need  for 
a  war-wealth  levy.  The  increase  in  wealth  during  the  war  resulted 
from  advantage  taken  of  the  nation's  needs  in  a  crisis.  The  war 
demanded  sacrifices  from  all.  Huge  profits  should  not  have  been 
made,  but  once  having  been  made  they  should  now  be  reclaimed 


THE    CAPITAL    LEVY    IN    GREAT    BRITAIN  507 

by  the  state.  War  profits,  left  after  taxes,  contributed  nothing 
to  the  war  and  should  be  taken  at  the  end  of  the  war  to  liquidate 
the  resultant  liabilities.  War-made  wealth,  it  is  argued,  consists 
chiefly  of  slacker  dollars,  accumulated  through  profiteering  and 
at  the  expense  of  the  country.  War  wealth  should  pay  war  costs. 
The  war-wealth  levy  may  be  justified  on  a  number  of  grounds. 
It  would  tend  to  allay  the  unrest  which  resulted  from  the  contrast 
between  the  burdens  that  inflation  generated  by  the  war  imposed 
upon  the  poorer  classes  and  the  great  fortunes  which  were  ac- 
cumulated by  the  war  profiteers.  The  allaying  of  social  unrest 
would  tend  to  increase  production  and  exports  and  thus  probably 
aid  in  restoring  the  exchange.  By  retiring  the  floating  debt  and 
Ways  and  Means  advances,  the  war-wealth  levy  would  aid  in  the 
deflation  of  currency  and  credit  and  lower  the  cost  of  living. 
Furthermore,  it  would  reduce  the  outstanding  indebtedness  and 
afford  relief  from  heavy  taxation.  It  would  improve  the  national 
credit  and  thus  make  possible  the  refunding  of  the  outstanding 
bonds  on  a  lower  basis. 

ii.   Objections  to  a  War-Wealth  Levy 

It  is  said  that  the  war-wealth  levy  is  unjust  because  it  taxes 
unequally  two  individuals,  having  the  same  present  capital  and 
income,  and  that  it  violates  the  principle  of  the  equality  of  sacrifice. 
By  regarding  the  war  as  a  distinct  period  in  the  economic  history 
of  the  country,  it  seems  just  and  reasonable  to  insist  that  war 
wealth  should  pay  war  charges  for  if  the  undue  advantages  ac- 
cruing to  particular  individuals  during  the  war  were  eliminated, 
the  principle  of  equality  of  sacrifice  would  prevail. 

Another  objection  to  the  war-wealth  levy  is  that  it  reopens 
the  question  of  the  excess-profits  tax.  However,  the  government 
never  gave  any  pledge  that  the  excess-profits  tax  was  a  final  set- 
tlement of  the  question  of  war  profits  nor  did  it  ever  waive  the 
right  to  impose  a  higher  or  a  different  tax  on  war  profits.  Further- 
more conditions  have  changed  and  plants  which  were  written  oH 
during  the  war  out  of  excess  profits,  increased  in  value  after  the 
signing  of  the  armistice.  Again  it  is  objected  that  the  war-wealth 
levy  does  not  make  any  distinction  between  increases  in  wealth  due 
to  the  war  and  increases  in  wealth  not  due  to  the  war.  The  re- 
futation of  this  point  is  that  suffering  was  widespread  during  the 


5o8        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

war  and  that  no  wealth,  however  acquired,  during  the  crisis 
should  be  allowed  to  remain.  Furthermore  the  state  allows  a 
varietj'  of  abatements  in  order  to  minimize  the  injustice  of  the  war- 
wealth  levy.  Finally  it  is  argued  that  the  war-wealth  levy  chal- 
lenges the  profit  motive  and  checks  the  driving  force  of 'industrial 
life.  However,  the  profit  motive  has  been  questioned  before  the 
war  in  the  development  of  social  legislation  as  well  as  since  the  war 
In  the  regulation  of  prices  and  of  profits. 


iii.   The   War-Wealth  vs.  the  Capital  Levy 

Both  the  capital  levy  and  the  war-wealth  levy  are  attempts  to 
clear  the  nation  of  a  large  part  of  its  burden  by  a  single  measure. 
The  income  tax  would  solve  the  same  problem  by  a  series  of 
levies  over  a  period  of  years.  There  are  several  points  of  distinc- 
tion between  the  war-wealth  levy  and  the  capital  levy.  The 
capital  levy  would  take  profits  earned  before  or  during  the  war 
according  to  the  rules  of  the  present  social  system.  The  levy  on 
war-wealth  would  take  only  those  profits  that  were  acquired  In 
the  nation's  distress.  The  capital  levy  counteracts  the  profit 
motive  and  the  war-wealth  levy,  the  profiteering  motive.  The 
capital  levy  would  take  the  fruits  of  historic  enterprising,  the 
war-wealth  levy  would  take  the  fruits  of  war-time  exploitation. 
The  war-wealth  levy  differs  from  the  capital  levy  much  as  the 
war-profits  tax  differs  from  the  excess-profits  tax.  The  standards 
of  the  former  are  pre-war  profits,  and  of  the  latter  percentage  of 
capital. 


iv.  The  Theory  and  Method  of  the  War-Wealth  Levy^^ 

The  Select  Committee  of  the  House  of  Commons  appointed 
to  inquire  into  the  proposal  to  impose  a  tax  on  war-time  in- 
creases of  wealth,  and  to  report  whether  such  a  tax  is  practicable, 
and,  if  so,  what  form  it  should  take,  have  agreed  to  the  following 
report : — 


"Copy  of  Final  Report  from  the  Select  Committee  on  Increase  of  War 
Wealth  to  the  House  of  Commons,  Ma}-  13,  1920. 


THE    CAPITAL   LEVY    IN    GREAT    BRITALN  509 

4.  The  Board  of  Inland  Revenue  have  come  to  the  conclusion, 
that  the  only  practicable  method  of  approaching  the  problem  is  by  a 
comparison  of  the  aggregate  wealth  of  individuals  as  ascertained 
by  a  valuation  at  two  fixed  dates,  and  they  contemplate  that  duty 
would  be  charged  at  graduated  rates  on  the  increase  shown  by  these 
two  valuations.  The  dates  suggested  by  the  Board  are  the  30th 
June,   1914,  and  the  30th  June,   1919. 

5.  Under  the  suggested  scheme,  taxpayers  liable  would  be  required 
to  furnish  returns  giving  particulars  of  their  wealth  both  at  home  and 
abroad  at  the  two  dates,  and  stating  the  value  of  the  assets  at  each 
date.  In  order  to  avoid  delay,  provisional  assessments  would  be  made 
on  the  basis  of  the  values  shown  in  the  returns.  In  any  case  where, 
it  was  found  that  the  provisional  assessment  was  incorrect,  that  as- 
sessment  would   naturally   be   subject   to   revision. 

6.  It  is  contemplated  that  the  duty  would  be  payable  either  in 
cash  or  by  the  transfer  of  Government  Stock  or  other  approved  securi- 
ties and  that  in  cases  where  the  payment  of  the  duty  in  a  lump  sum 
would  involve  the  taxpayer  in  difficulties,  e.g.,  in  cases  where  a  tax- 
payer's resources  are  locked  up  in  business,  payment  would  be  ac- 
ceptable by  installments  with  interest  over  a  period  of  years. 

7.  The  schem.e  provides  for  the  constitution  of  a  strong  appellate 
body  to  decide  disputed  questions  (subject  to  an  appeal  to  the  courts 
on  points  of  law)  and  for  the  imposition  of  heavy  penalties  to  check 
evasion. 

8.  In  the  memoranda  in  which  this  scheme  was  placed  before  your 
Committee,  the  Board  of  Inland  Revenue  submitted  for  purposes  of 
illustration  two  graduated  scales  of  duty.  Under  these  scales,  duty 
would  be  charged  at  rates  ranging  from  28  per  cent  to  nearly  80  per 
cent  on  the  amount  of  the  increase  shown  by  the  two  valuations, 
subject  to  a  general  tax-free  allowance,  in  one  case  of  £2,000,  and  in 
the  other  of  an  amount  equivalent  to  10  per  cent  of  the  pre-war 
wealth.  Under  both  scales  it  was  suggested  that  persons  whose 
post-war  wealth  did  not  exceed  £5,000  should  be  exempt  from  the  tax. 
It  was  estimated  that  the  yield  of  duty  under  these  illustrative  scales 
would   amount  to  £900,000,000  and  £1,000,000,000  respectively. 

The  Board  of  Inland  Revenue  estimate  that  the  aggregate  of  the 
individual  increases  of  wealth  for  the  whole  population  of  the  United 
Kingdom  is  £4,160,000,000,  and  that  if  the  increases  in  the  hands  of 
those  persons  whose  post-war  wealth  does  not  exceed  £2,000  are  ex- 
cluded there  remains  an  aggregate  increase  of  £2,846,000,000  in  the 
hands  of  340,000  persons,  and  it  is  only  to  this  reduced  sum  that  the 
original  scheme  would  apply, 

9.  On  a  close  examination  of  the  suggested  scales,  it  became 
evident  to  your  Committee  that,  unless  far  heavier  tax-free  allow- 
ances were  granted  than  those  for  which  provision  was  made  in  these 
two    scales — 

(a)  The  proposed  tax  would  fall,  not  only  on  the  class  who 
had  large  profits  owing  to  the  exceptional  conditions  arising  out  of 
the  war,  but  equally  on  those  citizens  who  had  increased  their  wealth 
by  hard  work  and  severe  economy;  and 


5IO        INTERNATIONAL    TINANCE    AND    ITS    REORGANIZATION 

(b)  Liability  to  the  tax  would  arise  in  cases  where  the  only 
increase  of  wealth  was  an  increase  in  money-value  due  to  the  general 
reduction  in  the  purchasing  power  of  money. 


V.  Conclusions  of  Committee   on    War-Wealth   Levy — 

17.  The  terms  of  reference  to  your  Committee  direct  them  to 
report  on  two  questions,  viz : — 

(a)   The    practicability    of    a    tax    on    war-time    increases    of 
wealth: 
and 

(b)   If  such  a  tax  is  practicable,  what  form  it  should  take. 
After  a  close  examination  of  these  questions  and  consideration  of 
the   evidence,   laid  before  them,   your   Corammittee   have  come   to  the 
following  conclusions. 

18.  They  are  of  opinion  that,  although  the  administration  of  a  tax 
of  this  character  would  involve  many  difficulties,  yet  those  difficulties 
should  not  be  insurmountable,  and  in  its  main  features  the  scheme  of 
the  Board  of  Inland  Revenue,  is  practicable  in  an  administrative 
sense,  inasmuch  as: — 

(a)  The  examination  of  taxpayer's  returns,  valuation  of  prop- 
erty and  assessment  and  collection  of  duty  could  be  carried  out  in  an 
effective   and  impartial  manner; 

(b)  The  cost  of  administration  and  collection,  having  regard 
to  the  amount  of  the  estimated  yield,  would  be  small. 

On  the  other  hand,  the  duty  of  the  taxpayer  to  furnish  a  return 
of  his  wealth  at  the  two  dates,  and  a  statement  of  its  value  would 
involve  him   in   both  trouble   and   expense. 

19.  The  effect  of  the  large  abatements  now  proposed  is  that  the 
burden  of  taxation  would,  in  the  main,  be  cast  only  upon  those  indi- 
viduals who  could  most  justly  be  called  upon  to  make  the  sacrifice 
and  that  the  tax  would  discriminate  against  those  who  had  made  ex- 
ceptional  profits   in   consequence  of  the   war  conditions. 

20.  As  regards  the  question  of  practicability  in  its  wider  sense 
of  expedience  and  desirability  your  Committee  feel  that  this  question 
is  one  which  can  only  be  determined  with  regard  to  national  and 
financial  conditions  in  general. 

21.  If  the  financial  position  of  the  country  is  such  that  it  be- 
comes a  matter  of  urgent  necessity  to  raise  a  sum  of  the  magnitude 
of  £500,000,000  which  cannot  be  obtained  by  other  means,  the  ob- 
jections raised  against  a  tax  of  this  character  should  not  be  allowed  to 
stand  in  the  way  of  the  imposition  of  such  a  tax  to  meet  the  national 
emergency.  Moreover  although  the  suggested  tax  is  strongly  opposed 
by  the  financial  and  commercial  world,  there  is,  on  the  other  hand,  a 
very  large  body  of  public  opinion  which  regards  it  not  only  as  ex- 
pedient but  as  a  just  and  necessary  attempt  to  equalize  the  losses 
suffered  during  the  war. 


THE    CAPITAL    LEVY    IN    GREAT    BRITAIN  51I 

22.  Your  Committee  desire  to  point  out,  however,  that  since  they 
were  appointed  the  financial  conditions  governing  the  problem  have 
been  largely  modified: — 

(a)  By  the  budget  proposals  of  the  Chancellor  of  the  Ex- 
chequer, including  the  proposal  to  increase  the  rate  of  excess-profits  duty 
as  an  alternative  to  a  tax  on  war-time  increases  of  wealth. 

(b)  By  the  offer  of  the  new  5-15  year  treasury  bonds. 

23.  Whether  in  the  present  financial  position  a  tax  of  this  descrip- 
tion is  desirable  or  expedient  as  an  alternative  to  excess-profits  duty 
or  to  the  taxation  of  profits  in  any  other  form  is  a  matter  on  which 
your  Committee  feel  that  it  is  not  within  their  province  to  pronounce 
an  opinion  and  they  must  therefore  leave  that  question  to  the  decision 
of  the  House  of  Commons. 


24.  The  scheme  put  forward  by  the  Board  of  Inland  Revenue  might 
be  adopted,  subject  to  modification  on  certain  points.  Among  these 
are  the  following,  to  which  your  Committee  attach  considerable  im- 
portance : — 

(a)  That  special  relief  be  granted  in  the  case  of  combatants 
who  have  been  disabled  as  a  consequence  of  the  war  and  of  dependents 
of  those  who  have  lost  their  lives  while  fighting. 

(b)  That  war  securities  be  accepted  in  pa3maent  of  duty  at 
not  less  than  the  issue  price; 

(c)  That  the  large  general  abatements  granted  under  Scale  C 
(2)  render  it  unnecessary  to  grant  special  allowances  to  taxpayers 
who  are  married  and  have  dependent  children. 


J.  Summary 

i.  In  Favor  of  the  Levy 

It  is  theoreticallj^  desirable  to  wipe  out  the  debt  while  the 
value  of  money  is  low;  otherwise  the  burden  becomes  increas- 
ingly heavier.  Both  the  war-wealth  levy  and  the  capital  levy  would 
wipe  out  the  floating  debt  and  a  good  part  of  the  foreign  debt, 
would  raise  the  value  of  existing  securities,  would  lower  the  rate 
of  interest  on  new  capital,  and  would  release  future  production 
from  taxation. 

ii.  In  Opposition  to  the  Levy 

A  moderate  capital  levy  is  not  essentially  different  from  a  steep 
income  tax,  particularly  if  the  levy  calls  for  payments  on  the  in- 
stalment plan.  John  Stuart  Mill  said  that  a  capital  levy  "would 
be  merely  surrendering  to  a  creditor  the  principal  sum,  the  whole 


512        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

annual  proceeds  of  which  were  already  his  by  law  and  would  be 
equivalent  to  what  a  landowner  does  when  he  sells  part  of  his 
estate  to  free  the  remainder  from  mortgage." 

Ricardo  pointed  out  that  a  "man  would  be  equally  rich  whether 
he  continued  to  pay  £ioo  per  annum,  or  at  once  and  only  for  once 
sacrificed  £2,000."  Prof.  Heinrich  Dietzel  stated  that  there  is 
no  dififeience  between  a  single  or  a  recurrent  payment,  between  a 
capital  levy  or  an  income  tax,  between  the  "terrible  end"  and  the 
"endless  terror."  The  objections  to  a  single  levy  are  economic  and 
administrative.  In  attempting  to  effect  a  transfer  of  property  from 
persons  who  subscribed  to  fewer  war  bonds  than  the  equivalent  of 
their  pro-rata  share  of  the  levy,  to  persons  who  subscribed  more 
than  their  share,  the  state  would  meet  with  many  difficulties.  From 
20  to  45  per  cent  of  the  total  private  wealth  is  difficult  of  assess- 
ment. The  levy  would  be  based  on  an  indefinite  and  estimated 
amount,  capital  valuation.  Capital  in  private  hands  is  more  pro- 
ductive, so  that  the  burden  of  the  debt  could  be  met  more  easily 
if  property  remained  undisturbed.  Finally  the  transition  period 
has  many  inevitable  perplexing  problems  and  it  is  inadvisable  to 
add  to  them  a  procedure,  the  advantages  of  which  are  doubtful 
and  the  difficulties  of  which  are  very  evident. 

iii.  Official  Action 

On  June  2,  1919,  the  House  of  Commons  rejected  by  a  vote  of 
317  to  72  the  proposal  made  by  the  Liberal  party  and  indorsed  by 
the  Labor  party  for  a  levy  on  capital  as  a  means  of  discharging 
part  of  the  war  debt.  The  question  was  brought  up  again  and 
on  February  16,  1920,  the  House  of  Commons,  by  a  vote  of  167  to 
62,  on  the  government's  motion  for  the  appointment  of  a  committee 
to  inquire  into  the  practicability  of  a  tax  on  the  war-time  increases 
in  wealth,  defeated  an  amendment  to  extend  the  inquiry  to  the 
practicability  of  a  general  capital  levy  to  reduce  the  national  debt. 
Austen  Chamberlain,  the  Chancellor  of  the  Exchequer,  argued  that 
the  capital  levy  would  encourage  extravagant  spending,  discourage 
saving,  check  enterprise  and  create  fear  and  insecurit}'.  He  be- 
lieved that  heavy  death  duties  "constituted  the  only  possible  and 
practicable  levy  on  capital.  It  is  paid  once  by  every  individual 
estate  in  addition  to  the  heavy  income  tax  paid  during  the  life- 
time of  the  owner  of  the  estate." 


THE   CAPITAL    LEVY   IN    GREAT    BRITAIN  $13 

The  war-wealth  le-^/y  never  came  to  a  vote.  On  June  7,  1920, 
the  Chancellor  of  the  Exchequer  stated  in  the  House  of  Commons 
that  "the  government,  after  full  consideration  of  the  report  of 
the  Select  Committee,  and  of  the  respective  advantages  and  dis- 
advantages of  the  suggested  scheme  for  a  levy  on  war-wealth,  have 
come  to  the  conclusion  that  the  dangers  attendant  upon  such  a 
levy  altogether  outweigh  any  advantages  which  could  be  derived 
from  it,  and  have  decided  not  to  make  any  proposals  in  that  sense 
to  the  House." 

Mr.  Chamberlain  pointed  out  that  the  returns  from  the  levy 
would  be  less  than  were  expected,  that  the  originally  estimated 
billion  pounds  sterling  could  not  be  obtained  without  injustice  and 
disaster,  and  that  the  final  estimate  of  500  millions  was  hedged 
about  with  conditions.  The  Select  Committee  had  neither  rec- 
ommended nor  approved  the  tax  but  had  left  it  to  the  decision  of 
the  Government.  They  had  shown  that  no  distinction  could  be 
made  between  profits  made  as  a  result  of  the  war  and  those  made 
merely  during  the  war,  or  between  wealth  due  to  increased  earn- 
ings and  that  due  to  increased  economy.  The  difficulties  of  valua- 
tion would  be  similar  to  those  of  the  land  tax,  then  recently 
repealed.  To  obtain  a  provisional  valuation  would  take  a  year 
and  during  the  following  two  years  it  might  be  possible  to  raise 
350  millions  of  the  estimated  500  millions,  while  the  remaining 
150  millions,  would  have  to  be  spread  in  installments  over  a 
period  of  perhaps  ten  years  in  order  to  avoid  financial  disaster  to 
particular  individuals.  On  the  other  hand  the  existing  excess- 
profits  duty  would,  at  the  prevailing  rate,  yield  in  the  course  of  the 
same  three  years  twice  as  much  as  the  350  millions  obtainable 
under  the  proposed  war-wealth  levy. 

Another  difficulty  of  the  war-wealth  levy  would  be  that  some 
property  valuations  had  already  partly  declined  or  might  ultimately 
vanish.  Again  the  uncertainty  in  which  every  business  man  would 
be  involved  for  at  least  one  year  and  possibly  for  two,  would 
unsettle  his  business  and  affect  the  banks  from  which  he  obtained 
credit.  Finally  the  situation  of  England  was  improving  and 
there  was  no  need  to  take  so  radical  a  step.  Sterling  exchange  had 
appreciated  during  the  year,  the  British  share  of  the  Anglo-French 
loan  had  been  met,  and  the  debts  to  Japan  and  Argentina  had  been 
provided  for.  The  internal  debt  would  be  reduced  both  in  1920 
and  1921.    The  basic  assumption  of  the  proponents  of  the  capital 


514        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

levy  and  of  the  war-wealth  levy,  namely  that  the  Exchequer  would 
be  unable  to  balance  the  budget  and  to  meet  the  maturing  external 
debts,  failed  of  realization.^- 

K.  The  Capital  Levy  in  France 

1.   Theory 

The  capital  levy  as  a  means  of  reducing  or  wnping  out  the  war 
debt  was  discussed  by  economists  as  early  as  191 6.  Prof.  Arthur 
Girault  of  the  University  of  Poitiers  did  not  believe  that  a  levy 
would  be  practicable  because  of  the  opposition  of  the  wealthy  and 
ruling  class.  In  theory  he  supported  the  analogy  between  the 
conscription  of  lives  and  of  wealth  yet  he  doubted  whether  the 
political  courage  necessary  after  the  war  would  equal  the  military 
courage  displayed  during  the  war.^^ 

Just  Haristoi,  a  financial  authority,  advocated  the  capital  levy, 
either  single  or  recurrent,  in  order  to  eliminate  the  inequalities 
of  wealth  produced  by  the  war.  However,  he  recognized  the  many 
difficulties  and  the  need  of  long  legislative  preparation," 

An  ultra-conservative  view  of  the  capital  levy  was  presented 
by  Francis  Roger,  embodying  the  same  arguments  that  were  ad- 
vanced in  Great  Britain. ^^ 

The  most  complete  study  of  the  capital  levy  in  France  was 
made  by  Gaston  Jeze,  editor  of  the  Revue  de  Science  et  de  Legis- 
lation Financieres,  in  a  series  of  articles  in  19 1 9.  He  presented 
the  difference  between  repudiation  and  the  capital  levy  and  showed 
how,  as  a  result  of  inflation,  the  war  industries  profiteered  on 
both  workmen  and  the  state.  In  spite  of  the  political  and  financial 
desirability  of  the  capital  levy,  class  prejudices  are  too  strong  to 
permit  its  introduction.^*' 

^Monthly  Review  of  the  London  City  and  Midland  Bank,  Ltd.,  June, 
1920. 

"Girault,  Arthur,  La  Politique  de  la  France  Apres  la  Guerre.  Paris, 
Tenin,  1916.  Allix,  Edgard,  Contra  le  prelevement  sur  le  capital,  Revue 
Politique  et  Parlementaire,  May  10,  1920,  pp.  145-164. 

"  Haristoi,  Just,  Finances  d'apres-guerre  et  conscription  des  fortunes. 
Paris:  Felix  Alcan,  1918.  Chapter  II  deals  with  the  problem  of  the 
post-war  budget,  chapters  IV  and  V  with  the  amortization  of  the  external 
and  internal  debt,  and  chapter  IX  with  the  conscription  of  wealth. 

^^  Roger,  Francis,  Les  Impots  sur  le  Capital.     Paris:  Marchal,   1918. 

"Jeze,  Gaston,  L'impot  extraordinaire  sur  Ic  capital,  Revue,  April, 
2919.    The  theory,  the  pros  and  cons,  and  a  review  of  the  literature  of 


THE    CAPITAL   LEVY   IN   GREAT   BRITAIN  515 

ii.   The  Procedure 

Proposals  for  a  capital  levy  date  back  to  pre-war  times.  On 
January  15,  1914,  M.  Caillaux,  then  Minister  of  Finance,  sub- 
mitted a  proposal  for  a  tax  on  capital.  However,  the  reason  for 
this  course  was  that  an  income  tax  was  lacking  in  France  and  a 
tax  on  property  was  considered  as  a  possible  substitute.  M. 
Magniaude  of  the  Chamber  of  Deputies  in  igi6  subm  ed  a 
proposal  for  a  capital  levy  but  it  found  no  support.  On  February 
28,  1918,  another  deputy,  M.  Albert  Metin,  former  Minister  of 
Public  Works  and  former  Under  Secretary  of  State  for  Finances, 
proposed  an  annual  tax  on  all  capital  graduated  from  0.5  per  cent 
to  2.5  per  cent  and  payable  out  of  income.^^ 

After  the  armistice,  the  spirit  of  victory  in  France  made  it 
politically  inexpedient  to  impose  a  capital  levy.  In  the  words 
of  M.  Klotz  "This  is  not  the  moment  to  propose  new  charges. 
There  probably  will  be  new  charges  at  all  events  but  first,  let 
Germany  pay."^* 

The  financial  program  of  M.  Klotz  of  February  19,  1919, 
provided  for  a  capital  levy.  However,  M.  Ribot,  former  Minister 
of  Finance  opposed  it  as  "impolitic,  unrealizable  and  uneconomic" 
for  it  would  become  impossible  to  float  further  loans.^^ 

In  the  Chamber  of  Deputies  M.  Peret  likewise  opposed  it.  As 
a  result,  M.  Klotz  abandoned  the  idea  in  his  financial  proposals 
of  May  27,  1919.  "In  accordance  with  the  interesting  suggestion 
of  M.  Paul  Doumer,  the  form  of  capital  levy  best  suited  to 
France  is  the  inheritance  tax,  graduated  according  to  the  degree 
of  relationship  of  the  heirs."'" 

So  long  as  the  French  electorate  look  forward  to  the  paym.ent 
of  a  huge  indemnity  by  Germany,  the  capital  levy  and  the  war- 

the  capital  levy  in  Great  Britain,  Germany,  Italy,  Austria,  United  States 
and  France.  The  continuation  in  the  July  and  October,  1919,  and  Jan. 
1920  numbers  deal   with  the   French  capital   levy  in  detail. 

"Documents   Parlementaires,   Annexe   No.   4371. 

"Journal  Officiel,  December  3,  1918,  Chambre,  p.  3236,  and  Senat, 
p.  813.    Jeze,  Revue,  1919,  p.  423. 

"Senat,  Debats,  March  5,  1919,  p.  237  and  Chambre,  Debats,  March 
7,  1919,  p.  1061.  See  also  Liesse,  Andre,  Danger  d'une  taxe  sur  I'enrichess- 
ment  en  le  presence  d'une  consolidation  necessaire  de  notre  dette  flottante. 
Economiste  Francais,  March  27,   1920,  pp.   385-7. 

**  Journal  Officiel,  Senat,  Debats,  May  27,  1919.  p.  829.  Jeze,  Revue, 
1919,  p.  444. 


5l6        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

wealth  levy  will  seem  academic  in  France.  However  upon  the 
realization  that  no  one  nation  can  pay  the  total  war  costs  of  its 
enemies,  and  that  Germany's  capacity  for  payment  is  limited, 
the  need  to  balance  the  budget  to  reduce  the  debt  and  to  eliminate 
the  floating  debt  may  yet  compel  France  to  enact  a  levy  on  capital 
or  on  war  wealth. 


L.  Capital  Levy  in  Germany 

i.   The  Discussion 

The  discussion  in  Germany  of  the  capital  levy  afifords  an  in- 
teresting reflection  of  public  opinion.-^ 

(a)  In  Favor  of  the  Property  Levy:  Stresemann,  Gothein,  Bern- 
hard,  Beuschj  Jaffe,  Steinberg,  Dub — 

The  idea  of  a  levy  on  property  was  made  public  and  became  the 
subject  of  discussion  in  connection  with  a  statement  of  Herr  Strese- 
mann, a  National-Liberal  deputy  in  the  Reichstag.  Speaking  on  Jan- 
uary 7,  1917,  at  a  meeting  of  National-Liberals  in  Hanover,  he  said 
that  "drastic  levies  on  propertj'  would  be  necessary',  including  in 
their  scope  even  small  properties,  and  amounting  to  from  a  quarter 
to  a  third  of  their  value.'"- 

Herr  Gothein,  a  deputj^  in  the  Reichstag  and  a  member  of  the 
"Freisinnige"  party,  also  defended  the  levy  on  property  in  an  article 
in  the  "Hilfe"  of  January  25,  1917.  He  argued  for  "a  single,  drastic 
confiscation  of  property  of  every  kind,  exempting  small  properties 
and  rising  by  a  graduated  scale  on  the  larger  properties."  His 
conclusion  nevertheless  was:  "It  needs  careful  examination  to  deter- 
mine whether  the  difficulties  of  assessment  involved  in  an  Imperial 
property  tax  of  a  confiscatory  nature  are  so  great  that  the  plan  must 
be  abandoned.  In  spite  of  all  the  serious  objections  that  may  be 
raised  against  it,  I  think  that  the  liquidation  once  for  all  of  the  greater 
part  of  the  loss  incurred  by  the  German  people  as  a  result  of  the 
war  is  preferable  to  the  endless  nightmare  of  continued  and  oppressive 
taxation." 

"  Opinions  for  and  against  the  levy  on  property,  as  summarized  by 
Professor  Diehl  of  Bonn  University.  From  the  Economic  Journal,  March, 
1919.  See  also  Jastrow,  J.  German  Capital  Levy.  Quarterly  Journal 
of  Economics,  xxxiv,  p.  462,  May,  1920.  Jeze,  Gaston.  L'Impot  Extraor- 
dinaire sur  le  Capital,  Revue  de  Science  et  de  Legislation  Financieres, 
1919  and  1920. 

'' "  Austriahungaricus,"  Einmalige  VermOgensabgabe?    Graz  and  Leipsic,  19 17. 


THE  CAPITAL  LEVY  IN  GREAT  BRITAIN         517 

George  Bernhard,  editor  of  Plutus,  expressed  himself  with  greater 
reserve  and  scepticism  on  this  extremely  serious  problem.  He  took 
the  attitude  that  the  levy  is  open  to  so  many  objections  from  the 
economic  viewpoint,  that  if  at  all  possible  it  ought  to  be  avoided. 
The  only  means  of  avoiding  it,  however,  would  be  a  large  war 
indemnity.  Lacking  this,  Bernhard,  too,  holds  that  the  property  levy 
is  necessary. 

Paul  Beusch  entitles  his  essay  "A  Great  Tithing."  His  proposal 
favors  a  single  levy  amounting  to  a  tenth  of  all  propert}-.  He  thinks 
that  in  this  way  a  sum  of  from  36  to  40  milliards  would  be  obtained. 

Edgar  Jaffe  likewise  thinks  that  the  economic  disadvantages  of 
permanent  taxation  at  an  oppressive  level  are  so  great  that  a  capital 
levy  is  to  be  preferred.  He  emphasizes  the  importance  of  an  Imperial 
Property  Othce,  to  be  entrusted  with  the  valuation  and  administration 
of  such  portions  of  property  as  could  not  be  handed  over  to  the 
state  in  the  form  of  cash.  "The  right  procedure  would  be,  not  to 
transfer  the  ownership  of  such  properties  to  the  state,  but  to  allow 
them  to  remain  in  the  possession  of  the  taxpayers,  managed  by  them 
for  their  own  account  and  at  their  own  risk,  but  burdened,  for  the 
benefit  of  the  state  with  mortgages  with  high  amortization  quotas." 

Julius  Steinberg,  a  bank  director,  of  Bonn,  also  admits  the  pos- 
sibilit>'  ''that  later  on  a  propert]/  levy  of  some  magnitude  might  be 
collected  in  a  single  payment,  such  as  would  enable  us  to  extinguish 
at  a  stroke  a  considerable  part  of  our  Imperial  debt."  But  according 
to  his  view  it  is  not  admissible  that  this  levy  should  even  approxi- 
mate the  extent  which  its  zealous  partisans  advocate  and  which  has 
spread   uneasiness   among  the  propertied  classes. 

The  idea  of  a  levy  on  property  passed  from  Germany  to  Austria, 
and  here,  too,  as  Dub  tells  us,  it  has  been  warmly  defended  after 
initial  opposition. ^3  He  mentions  the  tax  on  capital  introduced  in 
Hungary  as  early  as  the  spring  of  1916,  an  annual  tax  of  I/2  per  cent, 
levied  on  circulating  capital,  roughly  equivalent,  at  present  values, 
to  a  single  exaction  of  10  per  cent. 

(b)   Against  the  Property  Levy:  Mombert,  "Austria-hungaricus" 
Heilbrunn,  Konietzko,  Friedberg — 

The  economic  arguments  of  Mombert  against  the  property  levy 
are  based  on  the  retarding  influence  of  a  property  levy  on  the  ac- 
cumulation of  new  capital.  Further  he  has  an  objection  against  the 
time  chosen  for  the  application  of  the  levy  on  property.  It  v.ould 
be  dangerous  to  raise  billions  "at  a  time  when  the  national  economic 
life  is  in  unusual  need  of  recuperation,  when  every  enterpreneur  is 
striving  to  resume  operations  so  far  as  possible  on  the  same  basis  as 
before  the  war,  when  he  is  seeking  credit  to  procure  the  necessary  raw 
materials    and   to   complete    and    renew    his   machinery   of    production, 

"Dub,  Oesterreich-Ungarns  Volkswirtschaft  im  Weltkrieg.   Sammlung  von  finanz- 
und  volkswirtschaftlichen  Zeitfragen,  vol.  XXXVI,  1917. 


5l8        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

when  production  and  consumption  are  being  restored  to  their  former 
equilibrium,  and  when  in  the  interests  of  a  restored  national  economy 
efforts  are  being  made  to  build  up  again  the  old  edifice  of  credit,  so 
much  of  which  has  crumbled  under  the  stress  of  war."^^ 

The  anonymous  pamphlet  "Einmalige  Verraogensabgabe?"  by  "Aus- 
triahungaricus,"  is  specially  directed  against  Stresemann.  The  author 
contends  that  the  property  lev}'  runs  counter  to  the  principle  that  taxa- 
tion ought  not  to  upset  the  econcmic  situation.  "A  mortgage  on 
property  sounds  feasible  enough,  but  it  should  be  remembered  that 
the  levy  would  affect  many  cases  and  that  there  would  be  an  enormous 
strain  on  the  mortgage  market.  As  a  consequence  the  rate  of  interest 
would  rise  considerably,  to  the  discomfiture  of  the  consumer." 

Heilbrunn,  another  writer,  has  raised  objections  to  the  levy  on 
property  from  the  point  of  view  of  the  accumulation  of  capital."* 
"The  field  available  for  direct  Imperial  taxation,  namely  propertj',  can 
hardly  yield  sums  of  great  magnitude,  if  the  sources  of  new  capital 
are  not  to  be  unduly  tapped."  He  proposes  a  forced  loan  so  that  the 
burden  of  paying  interest  should  be  met  by  imposing  upon  property 
and  the  higher  incomes  the  obligation  of  taking  up  bonds  issued  by 
the  state,  paying  no  interest,  and  redeemable  at  par  by  definite  yearly 
quotas.  "This  obligation  diminishes  every  year  proportionately  with 
the  extinction  of  the  war  loans."  It  would  mean  that  every  person 
assessed  would  have  to  invest  a  percentage  of  his  propert}'  each  year, 
or  a  corresponding  part  of  his  income,  in  a  redeemable  state  obligation 
bearing  no  interest.  Though  this  plan  has  doubtless  an  advantage 
over  the  property  levy  in  so  far  as  it  avoids  a  single  hea\'j'  pajment, 
it  has  a  very  serious  drawback  for  it  imposes  on  the  taxpayer  a  very 
considerable,  though  yearly  decreasing,  burden  of  taxation,  fixed 
beforehand  for  a  long  term  of  years,  and  remaining  constant  in  spite 
of  changes  in  property  and  income.  A  definite,  relatively  high  tax 
is  assessed,  and  lasts  for  decades.  This  is  in  contradiction  to  the 
principles  of  a  rational  fiscal  policy,  which  should  adapt  a  tax  to 
continually  changing  economic  conditions.  Even  a  single  levy  admits 
of  a  greater  or  smaller  burden  being  imposed  according  to  the  eco- 
nomic  circustances   of   the   individual. 

Similar  objections  against  the  plan  were  put  forward  by  Konietzko. 
In  view  of  the  impossibility  of  universal  immediate  payment,  the 
state  would  allow  time  for  payment,  in  cases  of  necessity,  acting  as  a 
lender  of  the  amount  due,  this  being  fixed  by  a  single  assessment  to 
be  made  in  1918  or  1919.  The  amount  itself  and  the  interest  on  it 
would  be  paid  off  in  instalments  spread  over  thirt>'-six  years.  The 
state,  it  is  claimed,  would  in  this  manner  obtain  the  same  result  as  if 
it  received  the  whole  amount  at  once.  For  the  war  loans  would  be 
covered  and  the  burden  of  paying  interest  on  them  transferred  to  the 
taxpayer.*"  This  plan  is  opposed  by  Konietzko  on  the  following 
grounds:  "An  impost  of  this  nature,  fixed  for  thirtj-six  years  on  the 
basis  of  a  single  assessment,  runs  counter  to  all  the  principles  of 
taxation.  Every  tax  on  property  and  income  should  be  mobile.  It 
should  be  subject  to  reassessment  at  regular  intervals  of  relatively 
short  duration,  and  the  taxable  capacity  at  the  time  should  be  taken 

JiArchiv  fur  Sozlalwissenschaft  und  Sozialpolitik,  vol.  XLIII.,  part  in.,  p.  756 
^Ci.  the  essay,  Anleihen  und  Steuern,  in  the  morning  edition  of  the  Berliner  Tage« 
blatt  for  June  2  and  3,  1917. 
M  Vermogensbeschlagnahme  durch  das  Reich.  In  the  weekly  Marz,  May  i3,  1917. 


THE    CAPITAL    LEVY    IN    GREAT    BRITAIN  SI9 

into  account.  In  the  case  of  an  impost  to  be  paid  without  variation 
during  a  period  of  thirty-six  years,  no  regard  would  be  had  to  those 
changes  of  property  and  income  which  must  inevitably  take  place  in 
time  of  economic  stress  following  the  war.  As  a  substitute,  Konietzko 
proposes  an  Imperial  propertj'  and  income  tax.  With  the  prospective 
yield  of  the  suggested  levy  on  property  as  a  basis,  an  Imperial  income 
tax  and  supplementary  property  tax  might  be  instituted  on  a  scale  to 
obtain  from  the  taxpayer  the  sam.e  contribution  as  he  would  make 
under  the  scheme  of  deferred  payment  on  a  capital  levy. 

The  scheme  of  a  single  property  levy  was  very  decisively  rejected 
by  deputy  Friedberg  of  the  National-Liberal  party.  "The  state  is  to 
be  the  joint  owner  of  estates  and  houses,  the  proprietor  of  shares  in 
businesses!  It  does  not  receive  from  the  majority  of  taxpayers  a 
single  penny  in  cash,  and  it  burdens  itself  with  responsibilities  and 
administrative  duties  to  which  it  Is  altogether  unequal.  The  result 
must  be  that  income,  as  well  as  capital,  is  reduced  by  a  third,  and  the 
same  injury  is  inflicted  as  if  a  30  to  40  per  cent  income  tax  were 
imposed.""' 

ii.   The  Laws 

(a)   Non-Recurrent  Levy  on  Total  Wealth — 

A  series  of  drastic  property  taxes  was  enacted.  The  first  law 
(July  26,  1 91 8)  imposed  a  tax  of  o.l  per  cent  on  values  above 
mk.  ICX),000  up  to  0.5  per  cent  on  property  valued  over  mk.  2,000,- 
000.  A  non-recurrent  levy  on  total  wealth  was  put  into  effect  on 
January  14,  1920.  It  was  "a  heavy  tax  on  capital  as  a  sacrifice 
to  meet  the  financial  needs  of  the  country  after  the  war."  Persons, 
corporations,  and  accumulated  fortunes  were  liable  to  taxation. 
The  tax  applied  to  the  total  capital  as  of  December  31,  19 19. 
The  exemptions  specified  were  household  goods,  property  of  less 
than  mk.  5,000  per  oerson,  wife  or  child ;  as  well  as  the  property 
of  states,  municipalities,  churches,  universities,  savings  banks,  insur- 
ance companies,  the  Reichsbank,  charitable  institutions,  political 
parties,  etc. 

The  severity  of  the  tax  was  lessened  for  persons  over  45  years 
of  age  whose  property  was  less  than  mk.  150,000.  Deductible 
items  included  tax  arrears,  debts,  and  annuities  on  account  of 
poor  health.  Furthermore,  a  revised  assessment  of  the  tax  was 
authorized  up  to  December  31,  1922,  if  the  taxpayer's  property 
decreased  by  more  than  one-fifth.  War  loans  were  accepted  in 
payment  at  par  until  December  31,  1920.  Taxpayers  who  settled 
in  cash  received  a  preferential  discount  of  4  to  8  per  cent.     How- 

"Die  Abburdung  von  Kriegsschulden.  In  the  semi-monthly  Deutsche  Stimme  of  Jan. 
as.  1917.  p.39. 


520        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

ever,  installment  payments  were  provided  for  covering  a  period  of 
32  to  50  years,  upon  the  payment  of  5  per  cent  interest  and  i^ 
per  cent  amortization  per  annum.  Taxpayers  vi^hose  property  did 
not  exceed  mk.  100,000  and  annual  income,  mk.  5,000  were  entitled 
to  deferred  payment  without  interest.  The  payment  of  the  tax 
became  due  on  the  death  of  the  taxpayer. 

The  rates  of  taxation  ranged  from  lO  per  cent  on  the  first  mk. 
30,000  of  taxable  property  up  to  65  per  cent  as  an  upper  limit. 
A  few  typical  cases  are  given  herewith : 


Total  property  * 

Amount  of  levy 

Per  cent 

Marks 

Marks 

6,000 

100 

1-7 

10,000 

500 

5 

0 

20,000 

1,500 

7 

5 

50,000 

4,500 

9 

0 

100,000 

10,400 

10 

4 

500,000 

89,750 

17 

9 

1,000,000 

244,250 

24 

4 

5,000,000 

2,268,250 

45 

4 

10,000,000 

5,417,750 

54 

2 

50,000,000 

31,417,750 

62 

8 

100,000,000 

63,917,750 

639 

*  Including  the   exempt  mk.   5000. 

The  provisions  for  postponed  payment  make  this  capital  levy 
virtually  payable  out  of  income. 

(b)  The  Non-Recurrent  Levy  on  War-Time  Increases  of 
Wealth— 
This  tax,  applying  to  the  increase  of  property  of  individuals, 
took  effect  on  September  26,  1919.  The  taxable  amount  was  the 
difference  between  property  assessment  under  the  property  tax  of 
July  3,  191 3,  and  an  assessment  on  June  30,  19 1 9.  The  law 
exempted  property  under  mk.  10,000  and  all  property  increases 
under  mk.  5,000.  Taxpayers  were  permitted  to  deduct  from  the 
recent  assessment,  inheritances  received,  insurance  and  annuity  pay- 
ments, gifts,  proceeds  from  the  sale  of  foreign  property,  the  income 
tax  for  1919,  and  arrears  of  taxes  for  19 19  and  1918.  The  recent 
assessment  had  to  include  donations  made,  investments  in  foreign 
securities,   purchases  of   precious  metals,   works  of   art  or  other 


THE  CAPITAL  LEVY  IN  GREAT  BRITAIN         $21 

objects  of  great  value.  The  rate  of  taxation  began  at  10  per  cent 
for  the  first  mk.  10,000  of  increased  property  and  continued  upward 
on  a  sliding  scale  for  additional  increases,  up  to  100  per  cent  for 
all  increases  over  mk.  375,000.  War  loans  were  accepted  at  par 
in  payment  of  the  tax. 

The  provisions  for  paying  the  emergency  levy  in  installments 
defeated  the  object  of  the  levy,  which  was  to  retire  immediately 
a  large  part  of  the  debt.  After  the  enactment  of  the  measure, 
inflation  continued  and  property  values  rose.  Since  the  levy  was 
based  on  assessments  as  of  December  31,  19 19,  the  amounts  payable 
became  a  decreasing  fraction  of  the  subsequently  inflated  values 
and  could  retire  a  smaller  portion  of  the  debt  than  was  expected. 
Further,  budget  expenses  rose.  As  a  result,  the  returns  on  the 
capital  levy  were  applied  not  to  the  reduction  of  the  debt  but  to 
meet  current  needs.  To  correct  the  difficulty  it  was  proposed  to 
issue  a  forced  loan  or  to  accelerate  the  payments  under  the 
emergency  levy. 

M.  Capital  Levy  in  Other  Countries 

A  tax  upon  the  increase  in  capital,  payable  by  individuals  at 
rates  graduated  from  10  to  80  per  cent,  was  enacted  in  Italy.  In 
addition  to  this  war-wealth  lev}^,  a  tax  on  pre-war  capital  was 
put  into  effect.  It  applied  to  individuals  with  fortunes  above 
50,000  lire.  The  rates  were  graduated  from  5  to  25  per  cent. 
These  taxes  were  payable  in  installment  over  a  period  of  10  to  20 
years,  and  were  adopted  in  lieu  of  the  forced  loan  which  was 
proposed.'^  According  to  the  returns  of  the  first  annual  installment 
under  the  Italian  capital  levy  the  original  estimates  were  not 
realized.  Instead  of  620,000  individuals  liable  to  the  tax  only 
361,000  filed  returns.    The  wealth  subject  to  the  tax  was  estimated 

'^  For  further  discussion  see  Einaudi,  Luigi,  Taxes  on  Property  Incre- 
ments in  Italy.  Quarterly  Journal  of  Economics,  XXXV:  i  November, 
1920. 

Gini,  C,  Levy  on  Capital:  the  Italian  law,  Economic  Journal  XXX: 
119.   September,   1920. 

Revue  de  Science  et  de  Legislation  de  Financieres  XXVIII:  3  p.  507 
third    quarter,    1920. 

The  full  text  of  the  law  is  given  in  the  British  Board  of  Trade 
Journal,  June  10,  1920,  pp.  271-272. 

London  Economist,  August  21,  1920,  p.  300.  On  page  256  of  the  same 
issue  the  proposal  for  a  forced  loan  is  discussed. 


522        INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 

at  138,000  million  lire  but  only  half  the  sum  seemed  to  be  liable. 
As  a  result,  the  annual  yield  of  the  levy  was  only  450  million 
lire  as  compared  with  an  estimate  of  783  million  lire.-^ 

A  capital  levy  was  also  put  into  effect  in  Austria  and  Czecho- 
slovakia. 

Forced  loans  were  enacted  in  Holland  in  1920  and  discussed 
in  Australia  during  1919,  and  in  Germany  and  Denmark  during 
1920. 

"Report  of  A.  A.  Osborne,  Rome,  Commerce  Reports,  Nov.  20,  1920. 


CHAPTER  XIV 

NATIONAL  BANKRUPTCIES  IN  THE  NINETEENTH 
CENTURY 1 

The  huge  debts  piled  up  by  the  beUigerents  are  in  most  cases 
greatly  beyond  their  ability  to  pay,  particularly  if  deflation  should 
occur  and  the  purchasing  power  of  the  paper  money  should  rise 
toward  pre-war  levels.  Undoubtedly,  the  former  belligerents  in 
Europe,  with  the  exception  of  England,  will  have  serious  financial 
difficulties  for  some  time  to  come.  It  is  too  early  to  predict  the 
extent  or  nature  of  the  defaults  which  will  occur  in  the  countries 
of  Europe.  It  will  not,  however,  be  amiss  to  review  briefly  the 
causes  and  effects  of  national  bankruptcies  in  the  past. 

A.  The  Nature  of  National  Bankruptcies 

Practically  no  states  are  free  from  debt,  and  there  are  very 
few  states  whose  financial  history  is  free  from  bankruptcy.  From 
1820  to  1875  securities  of  48  countries,  amounting  to  613  millions 
sterling,  were  traded  in  on  the  London  Stock  Exchange.  Of  this 
total  157  millions  sterling  were  involved  in  unqualified  bankruptcy, 
175  millions  sterling  in  partial  bankruptcy,  and  only  281  millions 
sterling,  or  about  46  per  cent,  had  a  record  of  punctual  payments 
of  principal  and  interest.  Omitting  cases  that  bordered  on  bank- 
ruptcy, instances  of  clear  and  unquestioned  bankruptcies  in  the 
19th  century  were  numerous,  as  follows:  Spain,  1820,  1831, 
1834,  1851,  1867,  1872,  and  1882;  Austria,  1802,  1805,  1811, 
1816,  1868;  Germany,  1807,  1812,  1813,  1814,  1850;  Turkey, 
1875,  1876,  1881;  Portugal,  1837,  1852,  1892;  Greece,  1826  and 
1893;  Egypt,  1876;  Russia,  1839;  Holland,  181 4.  The  bank- 
ruptcies in  South  America  are  almost  too  numerous  to  mention 
and  even  in  the  United  States  12  states  defaulted  on  their  debts. 

^This  chapter  is  based  in  large  part  on  Manes,  Albert,  Staatsbankrotte, 
Berlin:  Karl  Siegismund,  1919,  and  annual  reports  of  the  Council  of 
Foreign  Bondholders.  The  references  for  further  study  are  chiefly  from 
Manes. 

523 


524        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

At  the  beginning  of  1916  loans  of  61  countries,  then  or  form- 
erly independent,  were  listed  on  the  London  Stock  Exchange.  Of 
these  35  met  their  obligations  faithfully,  and  26  failed  in  some 
form  or  other  to  do  so ;  11  political  entities  defaulted  in  part  only. 
They  were  Bahia,  Brazil,  Buenos  Aires,  Colombia,  Liberia, 
Nicaragua,  Para,  Paraguay,  Peru,  Salvador  and  Uruguay;  15 
political  entities  completely  failed  to  pay  either  interest,  amortiza- 
tion, or  principal,  Honduras  since  1873,  Mexico  since  1914, 
Ecuador  since  191 4,  Montenegro  since  19 14,  San  Luis  Potosi  since 
1914,  Corrientes  (Argentina)  since  1915,  and  nine  of  the  Con- 
federate states  for  over  half  a  century.^* 

There  are  differences  between  public  and  private  credit  and 
betvv^een  public  and  private  bankruptcy.  Private  credit  is  granted 
on  the  assumption,  that  in  case  of  dispute  or  default,  the  creditor 
may  have  recourse  to  a  court  of  law,  and  ultimately  the  right  to 
seize  the  property  of  the  debtor  in  order  to  satisfy  his  claim.  But 
neither  assumption  holds  in  public  loans.  In  private  credit,  loans 
are  relatively  short  term  and  therefore  the  important  consideration 
is  the  ability  of  the  debtor  to  repay  the  principal.  The  assets 
must  be  ample.  Public  loans  on  the  other  hand  are  of  relatively 
long  term  and  the  deciding  factor  with  the  creditors  is  the 
ability  of  the  debtor  to  pay  the  interest.  Revenues  must  be 
adequate.  In  private  loans  the  lenders  make  the  terms,  the  use 
to  which  the  funds  are  to  be  put  must  be  stated  by  the  borrowers, 
the  lenders  frequently  are  represented  on  the  board  of  directors 
and  control  the  disposition  of  the  monies,  and  changes  of  manage- 
ment or  administration  do  not  affect  the  debt.  In  private  credit 
the  circumstances  of  the  borrower,  his  assets  and  income,  and  the 
specific  security  are  the  deciding  considerations.  But  public  credit 
depends  on  the  tax  rate,  the  form  of  wealth,  whether  in  land  or 
securities,  the  state  of  the  budget,  the  debt,  the  likelihood  of  peace, 
social  and  industrial  stability,  as  well  as  political  interest,  such  as 
friendship  for  an  ally  or  hostility  toward  a  political  and  commercial 
rival.  Natural  resources  are  of  value  in  supporting  credit  only 
if  they  are  productive. 

Correspondingly  there  are  important  differences  between  public 
and  private  bankruptcy.    An  individual  is  bankrupt  when  he  can- 

1*  For  details  see  introduction  to  Report  of  Council  of  Foreign  Bond- 
holders for  1 916. 


NATIONAL  BANKRUPTCIES   IN   THE   NINETEENTH  CENTITRY     525 

not  pay.  A  country  is  bankrupt  when  it  will  not  pay.  The 
individual  is  declared  bankrupt  by  a  court,  but  the  state  itself 
decides  when  it  is  bankrupt.  Individual  bankruptcy  usually  ruins 
the  debtor.  State  bankruptcy  on  the  other  hand  frequently  means, 
not  the  ruin,  but  the  renaissance  of  the  country.  In  fact,  most 
states  have  been  bankrupt  at  one  time  or  other.  Yet  their  credit 
revived  and  before  the  World  War  stood  higher  than  private 
or  industrial  credit.  There  is  a  remarkable  uniformity  of  definition 
of  national  bankruptcy.  According  to  leading  authorities,  national 
bankruptcy  is  defined  as  a  partial  or  complete,  open  or  secret, 
breach  of  the  rights  of  creditors  due  to  the  inability  or  lack  of 
desire  of  debtors  to  meet  their  unquestioned  legal  obligations.^ 

Foreign  loans  were  made  as  early  as  the  seventeenth  century 
by  Great  Britain,  France  and  Holland.  But  up  to  the  period  of 
the  industrial  revolution  capital  was  invested  internally  chiefly.^ 
In  the  nineteenth  century  and  more  particularly  in  the  twentieth 
century  capital  became  more  international  and  foreign  loans  became 
common.  The  World  War  extended  this  international  tendency 
and  within  both  groups  of  powers  very  large  advances  were  made 
by  the  richer  governments.  At  the  end  of  the  war  the  belligerent 
governments  were  bound  to  each  other  by  a  network  of  extensive 
loans. 

After  the  beginning  of  the  nineteenth  century  there  was  an 
increase  in  national  indebtedness  incurred  for  productive  purposes 
such  as  transportation.  Simultaneously,  national  bankruptcies 
increased.  Although  the  bankruptcies  of  the  nineteenth  century 
were  public,  rather  than  secret  or  disguised,  foreign  creditors  were 
frequently  defrauded  or  discriminated  against  by  divers  subterfuges. 
The  states  of  Southeastern  Europe  represent  stages  of  development, 
which  are  intermediate  between  primitive  and  modern  methods  of 
public  finance,  and  which  middle  and  v/estern  Europe  had  attained 
centuries  before.  A  veritable  clinic  of  pathological  financial  cases 
is  presented  in  the  states  of  southeastern  Europe,  including  financial 

"  Van  Daehne  van  Varick,  Le  droit  financier  international,  Haag,  1907, 
p.  4.     Pflug,  Staatsbankrott  unter  internationalem  Recht,  Munich,   1898,  p. 

I.  Collas,  Der  Staatsbankrott  und  seine  Abwicklung,  68.  Stuck  der  Mun- 
chener  volkswirtschaftlichen  Studien,  Stuttgart,  1904,  p.  5.  Waurin, 
Essai  sur  les  emprunts  d'Etats,  Genf,  1907,  pp.  61-62.  v.  Heckel,  Lehrbuch 
der  Finanzwissenschaft,  Leipzig,  1911,  p.  450. 

'  Sombart,  Der  raoderne  Kapitalisraus,  1917,  2d  Edition,  vol.  II,  Part 

II,  p.  1044. 


526        INTERNATIONAL   FINANCE    AND   ITS    REORGANIZATION 

impoverishment,  breach  of  faith,  and  deception  of  creditors."*  The 
states  of  South  and  Central  America  likewise  afford  examples  of 
chronic  bankruptcy.  For  example  Colombia  experienced  almost 
every  form  of  bankruptcy,  including  suspension  and  cessation  of 
payment  of  interest  and  principal,  composition  with  creditors, 
change  of  terms  of  previous  settlements,  and  so  on,  all  in  the 
space  of  less  than  1 00  years.  From  1820  to  1916  Colombia 
announced  its  bankruptcy  13  times. 

Bankruptcies  usually  are  a  sequel  to  fundamental  political 
changes.  In  1867  Hungary  repudiated  the  debt  contracted  under 
the  previous  regime.  Prussia  went  through  national  bankruptcy 
several  times,  as  a  result  of  political  changes.  The  establishment 
of  Italy  was  followed  by  an  extensive  bankruptcy.  The  Republic 
of  Mexico  repudiated  the  debt  contracted  under  Maximilian  and 
the  imperial  regime.  The  Argentina  state.  La  Plata,  repudiated 
its  debt  as  a  result  of  a  change  in  its  political  relations.  Of  the 
succession  states  of  the  old  Austrian  Empire,  Jugoslavia  and  Czecho- 
slovakia are  attempting  to  repudiate  their  share  of  the  national 
debt.  These  examples  illustrate  the  fact  that  new  governments 
attempt  to  get  rid  of  old  obligations  and  to  clear  up  their  old 
finances  by  means  of  bankruptcy,  which  in  frequent  cases  is  merely 
the  recognition  of  an  established  fact. 

B.  Types  of  National  Bankruptcies 

Bankruptcy  involves  the  impairment  of  the  obligation  to  pay 
interest,  or  principal,  or  both.  Manes  classifies  the  types  of  bank- 
ruptcy according  to  the  following  scheme: 

1.  Default  on  interest: 

a.  Reduction  of  the  rate 

b.  Postponement  of  payment 

c.  Cessation  of  payment 

d.  Special  taxes  on  interest  paid 

2.  Default  on  principal: 

a.  Postponement  of  payment 

b.  Conversion  into  other  forms  of  debt  or  forced  conversion 

c.  Reduction  of  the  principal 

d.  Conversion  of  a  gold  debt  into  a  paper  debt 

*Politis,  Les  Emprunts  d'Etat  en  droit  international,  Paris,  1884,  p.  1. 
Gustav   Cohn,   Finanzwissenschaft.     Stuttgart:   1889. 


NATIONAL   BANKRUPTCIES    IN   THE    NINETEENTH   CENTUHY      $27 

3.  Simultaneous  default  on  both  principal  and  interest 

a.  Reduction  of  both 

b.  Repudiation 

In  addition  to  the  above  types,  bankruptcies  may  be  further  clas- 
sified with  respect  to  the  discrimination  between  creditors,  such 
as  native  or  foreign,  rich  or  poor,  and  with  respect  to  the  impair- 
ment of  pledges  or  collateral. 

i.  Default  on  Interest 

(a)  Reduction  of  the  Rate  of  Interest — 

For  a  long  time  after  1873  Greece  paid  only  30  per  cent  of 
the  face  value  of  the  interest  coupons  on  her  debt.  Portugal  com- 
pelled her  creditors  after  1841  to  accept  a  reduction  in  the  rate  of 
interest  from  4  per  cent  to  23/2  per  cent.  As  a  result  of  the 
Turkish  bankruptcy  of  1875  the  government  paid  one-half  of  the 
interest  in  cash  and  the  other  half  in  scrip,  payable  six  years  later. 
However,  by  1876  Turkey  defaulted  even  on  the  partial  payments. 

(b)  Deferment  of  Payment — 

History  records  numerous  cases  of  the  cessation  of  payment  of 
interest,  temporarily  or  permanently,  to  permit  national  recupera- 
tion after  a  war  or  other  political  disturbances.  In  1820,  1834, 
1854,  3nd  1867  Spanish  bankruptcies  took  the  form  of  cessation 
of  payment  of  interest,  which  was  resumed  only  when  new  loans 
had  to  be  incurred.  By  legislation  in  1834  one-third  of  the  interest 
on  the  debt  was  declared  void  and  the  remaining  two-thirds  was, 
by  a  forced  conversion,  paid  in  new  bonds.  Prussia  suspended 
interest  payments  on  external  loans  from  1806  to  1811  and  on 
internal  loans  from  1806  to  1814.  Greece  suspended  payment  of 
interest  for  half  a  century  after  1827.  The  records  of  Argentina, 
Mexico,  Salvador,  Guatamala  and  Ecuador  show  similar  deferment 
and  cessation  of  interest  payments.  The  postponement  of  interest 
payments  is  really  not  a  form  of  bankruptcy  but  a  sort  of  mora- 
torium, particularly  if  the  state  makes  good  on  its  default. 

(c)  Taxes  on  Interest — 

A  tax  on  interest  coupons  is  not  a  disguised  form  of  bankruptcy 
unless  such  a  tax  is  levied  on  specific  issues, °  in  which  event  it 

*Von  Heckel,  Finanzwissenschaft,  vol.  II,  p.  453. 


528        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

has  the  effect  of  a  reduction  of  the  rate  of  interest  or  a  forced 
conversion  into  a  lower  rate.  The  taxation  of  interest  coupons 
is  frequently  resorted  to  in  spite  of  undertakings  at  the  time  of 
issue  not  to  tax  interest  payments.  In  1868  Austria  levied  a  16 
per  cent  tax  on  the  interest  of  its  bonds  and  thus  reduced  the  rate 
from  5  per  cent  to  4.2  per  cent.  In  1882  Spain  issued  a  4-per 
cent,  tax-exempt  loan,  but  after  the  Spanish-American  War,  the 
interest  on  this  loan  was  subject  to  a  20  per  cent  tax  if  held 
internally.  In  1855  Russia  introduced  a  coupon  tax  of  5  per  cent 
on  both  domestic  and  foreign  holders  of  her  bonds.  In  1894  Italy 
raised  the  existing  tax  on  interest  coupons  by  50  per  cent.  These 
cases  afford  historic  precedents  for  the  countries  of  Europe  and 
undoubtedly  during  their  reconstruction  they  will  utilize  this 
method  of  reducing  the  annual  charges. 

ii.  Default   on   Principal 

(a)  Postponement  of  Payment — 

In  the  past  hard-pressed  governments  have  diverted  funds 
reserved  for  the  retirement  of  the  debt  with  the  result  that  the 
repayment  of  the  principal  was  postponed.  Such  was  the  case  in 
France  in  1770  under  Louis  XV.  Terray,  Minister  of  Finance, 
was  unable  to  balance  his  budget  and  therefore  applied  sinking- 
fund  installments  against  current  expenses.  Numerous  cases  of 
this  form  of  bankruptcy  are  recorded  in  the  history  of  South 
American  public  finance.  In  fact,  suspension  of  the  payment  of 
interest  is  usually  accompanied  by  the  failure  to  make  annual 
provision  for  the  sinking  of  the  loan.^ 

(b)  Conversion  of  Principal — 

Conversion  into  securities  bearing  lower  rates  of  interest,  or 
into  less  desirable  forms  of  securities  may  be  effected  with  or  with- 
out the  consent  of  the  bondholders.  The  right  to  convert  its  bonds 
into  lower  interest-bearing  securities  is  regarded  as  an  indefeasible 
right  of  governments  even  though  many  bonds  contain  a  clause 
forfeiting  this  right  for  a  period  of  years.  The  examples  of  forced 
conversion  are  numerous  during  the  nineteenth  century.  The 
Egyptian  national  debt  prior  to  1830  ranged  from  7  to  9  per  cent, 
and  as  a  result  of  a  forced  conversion  the  rate  was  reduced  to 

"Manes,  2nd  edition,  ibid.,  p.  47. 


NATIONAL   BANKRUPTCIES   IN   THE   NINETEENTH  CENTURY      529 

range  from  4  to  5  per  cent.  Servia  similarly  reduced  the  interest 
on  her  5  per  cent  rentes  to  4  per  cent.  In  cases  of  forced  con- 
version, the  holder  has  no  choice  but  to  accept.^ 

(c)  Reduction  of  the  Principal — 

A  classic  example  of  the  reduction  of  the  principal  is  the  case 
of  the  French  Directory  which  in  1797  reduced  the  outstanding 
debt  to  one-third  of  its  total  and  for  the  remaining  two-thirds 
holders  received  notes  which  were  accepted  in  the  purchase  of  the 
state  lands.  The  example  of  France  was  followed  in  Holland  and 
in  Westphalia. 

(d)  Conversion  of  a  Gold  Debt  into  a  Paper  Debt — 

The  depreciation  of  the  currency,  as  a  form  of  national  bank- 
ruptcy, was  practiced  even  in  ancient  Rome.  In  modern  times 
instead  of  debasing  the  coinage,  governments  replace  it  by  paper. 
In  1893  the  amount  of  the  state  bonds  of  Greece  was  thus  reduced 
by  70  per  cent  and  in  1899  by  the  same  process  the  amount  of  the 
Portuguese  bonds  was  reduced  by  66^  per  cent.  Both  the  Por- 
tuguese and  the  Greek  bankruptcies  affected  chiefly  foreign  credit- 
ors. But  in  1839  the  analogous  Russian  bankruptcy  involved  only 
Russians. 

iii.  Native   vs.    Foreign    Creditors 

The  debts  left  as  a  legacy  of  the  World  War  involve  internal 
and  external  debts,  war  loans  as  well  as  pre-war  and  post-war 
loans.  The  term  "repudiation  of  national  debts"  was  first  applied 
to  the  repudiation  of  Mississippi  in  1841,  as  a  result  of  the  cotton 
crisis  of  1839.  Repudiation  was  frequently  repeated  thereafter, 
particularly  among  the  southern  states.  The  popular  disinclination 
to  pay  taxes  to  retire  foreign  loans  gave  political  support  to  this 
policy.  Attempts  to  justify  repudiation  were  based  on  the  ground 
that  the  loans  were  contracted  in  an  illegal  manner  or  that  the 
law  which  authorized  the  incurring  of  the  debt  was  unconstitu- 
tional, or  if  the  law  was  valid  that  the  conditions  had  changed.^ 
The  repudiation  of  debts  always  operates  to  the  disadvantage  of 
foreign  holders,  for  the  failure  to  pay  interest  reduces  the  tax 

'Korner,  Die  Koversion  oflFentllcher  Schulden,  1893.  Freund,  Rechts- 
verhaltnisse  offentlicher  Anleihen,  Berlin,  1905,  p.  221. 

•Scott,  Wm.  A.,  The  Repudiation  of  State  Debts.    New  York,  1893. 


530        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

burden  of  the  domestic  creditors.  Discrimination  in  favor  of  the 
foreign  borrower  was  practiced  by  Prussia,  which  resumed  payment 
on  the  foreign  debt  in  i8il,  several  years  before  the  interest  on 
the  internal  debt  was  again  paid.  As  a  result  of  the  World  War 
a  new  era  in  the  history  of  national  bankruptcy  has  opened.  The 
pre-war  prediction  that  financial  exhaustion  would  limit  the  dura- 
tion and  the  scope  of  the  World  War  was  not  verified.  However, 
it  is  hardly  likely  that  the  nations  which  are  carrying  such  enormous 
burdens  can  escape  some  form  of  bankruptcy.  The  different  treat- 
ment of  internal  and  external  bonds  or  of  domestic  and  foreign 
holders  involves  much  difficulty,  for  in  the  case  of  most  of  the 
belligerents  internal  loans  were  offered  abroad  and  in  many  cases 
nationals  of  a  country  have  bought  its  external  loans.  Again, 
external  loans  in  many  cases  call  for  payment  in  gold  or  in  the 
currency  of  the  foreigner.  But  internal  loans  are  not  so  restricted, 
either  by  the  terms  of  the  bond  or  by  public  opinion.  However,  in 
the  past  the  stamping  of  bonds  or  the  filing  of  affidavits  as  to  the 
date  of  acquisition  or  ownership  did  afford  means  of  carrying  out 
these  distinctions. 

c.  consequexcfs  and  liquidation  of  national 
Bankruptcy 

i.  Results  of  National  Bankruptcies 

National  bankruptcy  results  temporarily  in  acute  misery.  Of 
course  the  worst  sufferers  are  the  holders  of  government  bonds, 
particularly  the  poor  people,  who  have  put  into  them  their  meager 
savings.  National  bankruptcy  is  followed  by  deflation,  unemploy- 
ment and  an  obstruction  of  industrial  production.  Private  bank- 
ruptcy usually  is  widespread,  for  banks  and  large  corporations  hold- 
ing government  securities  are  suddenly  deprived  of  a  large  share 
of  their  assets.  Investors,  "widows  and  orphans,"  and  institutions 
such  as  insurance  companies  and  savings  banks  with  income  from 
state  securities  suffer.  But  those  who  do  not  own  state  securities 
gain  relatively — the  bond  slackers,  the  hoarders  of  gold,  the  owners 
of  non-government  securities  or  foreign  securities  particularly,  and 
the  unpropertied  classes. 

The  Austrian  bankruptcy  in  i8ii  reduced  to  beggary  those 
that  lived  on  fixed  incomes  and  made  the  formerly  wealthy  investors 


NATIONAL   BANKRUPTCIES   IN   THE   NINETEENTH   CENTURY      53 1 

feel  the  pangs  of  hunger.  The  government  official  dependent  upon 
his  salary  was  reduced  beneath  the  level  of  the  laborer,  and  was 
hardly  able  to  keep  from  starving.  The  military  class  which  was 
fed  and  clothed  by  the  state  was  envied.  But  suicide,  despair,  and 
misery  were  soon  forgotten,  profiteering  was  ended,  and  the  con- 
tinued existence  of  the  state  was  assured.'' 

National  bankruptcy  is  usually  followed  by  an  industrial  revival. 
The  demoralizing  effect  of  depreciating  paper  is  ended.  The  debt 
charges  are  decreased  and  taxes  may  be  lightened.  The  bankruptcy 
at  the  time  of  the  French  Revolution  restored  the  finances  of  France 
to  soundness,  improved  her  exchange,  revived  her  industry,  and 
made  it  possible  for  her  to  renew  the  war  against  England.  The 
nationals  of  the  bankrupt  state  benefit  by  the  losses  of  foreign  credit- 
ors. However,  the  advantage  gained  by  defrauding  foreign  bond- 
holders is  offset  by  the  decline  in  the  credit  of  the  state.  Finally, 
if  the  foreign  debt  is  a  large  proportion  of  the  total  debt  and  is 
held  in  several  countries,  national  bankruptcy  may  result  in  inter- 
national complications. 

ii.  Liquidation    of  National  Bankruptcy 

In  liquidating  its  debts,  a  bankrupt  state  may  resort  to  repudia- 
tion, that  is,  unqualified  refusal  to  pay  either  interest  or  principal. 
Again,  it  may  effect  partial  restitution  through  the  deferred  pay- 
ment of  interest  and  principal.  Finally,  the  creditors  may  compel 
a  composition  and  the  part  payment  of  the  debt.  An  individual 
bankrupt  may  be  compelled  by  law  to  make  an  equitable  liquidation 
of  the  claims  against  him.  But  a  state  cannot  be  so  compelled. 
Furthermore,  its  bonds  usually  are  negotiated  so  that  the  investors 
who  bore  the  original  loss  cannot  be  indemnified.  However,  there 
have  been  several  cases  in  which  states  have  attempted  to  make  a 
just  settlement  on  their  defaulted  obligations.  In  181 4  Holland 
made  complete  restitution  of  the  one-third  of  the  debt  which  had 
been  in  default.  In  181 8  Austria  in  order  to  resume  the  interest 
payments  in  default  at  the  original  rate,  issued  a  premium  loan, 
whereby  the  interest  was  repaid  at  the  time  that  the  bonds  were 
drawn.  Argentina  in  1857  attempted  to  compensate  for  its  failure 
to  pay  interest  by  obligating  itself  to  sink  the  debt  at  a  progressive 

•Berglus,  Grundsatze  der  Finanzwissenschaft,  Berlin,  1877,  2d  Edition, 
p.  635.    Strassny,  Zum  osterrischen  Staatsbankrott  von  181 1,  p.  50. 


532        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

rate.  In  1855,  after  defaulting  on  interest  for  about  20  years, 
Ecuador  offered  to  liquidate  the  arrears  by  means  of  a  funded 
debt. 

Of  course,  in  most  cases  the  difficulty  of  getting  new  credit 
is  not  entirely  dependent  upon  the  liquidation  of  an  existing  bank- 
ruptcy. For  public  credit  differs  from  private  credit  in  that  it  is 
difficult  to  destroy.  A  new  generation  may  restore  the  impaired 
credit  of  a  state. 

D.  Protection   of   Foreign  Creditors 

With  the  increase  in  international  loans,  means  for  the  pro- 
tection of  foreign  creditors  have  been  developed,  including  measures 
of  prudence  in  contracting  the  loan  and  legal  or  military  measures 
for  enforcing  its  payment.  These  measures  include  guarantees, 
military  intervention,  the  formation  of  protective  committees, 
foreign  financial  control,  and  an  appeal  to  an  international  judicial 
court. 

i.  Guarantees 

Impliedly  every  state  guarantees  its  loans.  In  addition  Holland 
expressly  covenants  with  its  foreign  creditors  that  "the  obligations 
of  the  state  toward  its  creditors  are  guaranteed."  Spain  likewise 
provides  that  "the  public  debt  is  placed  under  the  special  protection 
of  the  nation."  The  receipts  from  taxes  and  monopolies  constitute 
security  for  the  payment  of  interest  and  amortization.  Originall}', 
in  the  early  periods  of  public  borrowing,  specific  security  was 
pledged.  Until  1900  Prussia  offered  the  crown  lands  as  collateral 
for  public  loans.  Later,  only  general  security  was  offered,  and 
the  strong  states  pledged  nothing  but  their  word.  Before  the 
war  no  great  power  gave  any  tangible  security.  During  the  war 
Great  Britain  and  France  pledged  their  holdings  of  American  and 
neutral  securities  as  collateral  for  loans  in  the  United  States.  The 
lesser  power  frequently  pledged  specific  assets  or  revenues  such  as 
customs  duties,  tax  revenue,  income  from  monopolies,  railroads, 
ports,  etc.  Such  pledges  were  offered  by  Greece  in  1887  and  1898, 
by  Servia  in  1884  and  1885,  by  Turkey  in  1881,  1885  and  1888, 
by  Egypt  in  1876,  1877,  1878  and  1885,  and  by  Mexico  in  1890. 
In  the  case  of  the  Egj'ptian  loan  six  European  powers  guaranteed 
payment  to  the  creditors.  The  most  striking  example  of  a  state 
guarantee  is  the  pledge  by  Turkey  for  successive  loans  of  her 
general  revenues,  a  tribute  from  Egypt,  the  customs  receipts  of 


NATIONAL   BANKRUPTCIES  IN  THE  NINETEENTH  CENTURY     533 

Smyrna  and  Syria  and  of  Constantinople.  After  these  had  been 
exhausted  Turkey  offered  among  other  possible  sources  of  revenue 
the  income  from  the  monopoly  of  tobacco  and  salt,  from  the  post- 
office  and  from  concessions.  The  Sultan  of  Morocco,  in  1907, 
borrowed  money  in  Paris  and  London  by  pawning  his  jewels,  the 
treasures  of  his  palace,  and  his  crown  lands. 

Several  dollar  loans  of  South  American  countries,  floated  in 
New  York  in  1920  and  1 921  were  secured  by  pledge  of  specific 
revenues.  Holders  of  dollar  loans  of  Belgium  and  Denmark  had 
the  privilege  of  sharing  pro-rata  in  any  future  liens  if  pledged. 

Secured  creditors  are  not  affected  by  the  bankruptcy  of  the 
debtor,  for  example  in  the  bankruptcy  of  Turkey  in  1 881  and  of 
Portugal  in  1892,  the  creditors  remained  secured  in  their  rights. 
During  the  liquidation  of  the  Egyptian  state  loans  in  1880,  three 
classes  of  state  creditors  were  recognized,  the  holders  of  mortgages, 
the  holders  of  other  pledges,  and  the  unsecured  creditors.  The 
Greek  loan  of  1833  was  guaranteed  by  England,  France  and 
Russian  and  from  the  default  of  Greece  until  1871  the  guarantors 
repurchased  bonds  in  the  hands  of  investors.  An  unusual  protection 
of  the  interests  of  foreign  creditors  was  put  into  effect  in  the 
Servian  5-per  cent  loan  of  1888,  which  stipulates  that  a  special 
fund  for  the  retirement  of  the  bonds,  based  on  the  business  tax, 
shall  be  administered  under  the  dual  control  of  a  representative 
of  the  government  and  of  the  holders,  and  that  adequate  income 
from  the  specifically  pledged  tax  shall  be  allocated  by  them  jointly 
to  the  loan.  A  similar  condition  is  included  in  the  5-per  cent 
gold  bonds  of  the  Servian  Agricultural  Credit  Institute.  Such 
conditions  prejudice  the  rights  of  the  holders  of  old  loans,  and  it 
is  questionable  whether  the  state  has  the  right  to  give  special 
security  to  new  holders. 

ii.  Intervention 
The  intercession  of  states  to  protect  their  nationals,  who  are 
creditors  of  a  defaulting  state,  was  frequent,  even  in  the  eighteenth 
century.  In  1848  Lord  Palmerston,  the  British  Secretary  of 
Foreign  Affairs,  in  a  statement  to  British  diplomatic  representatives 
in  foreign  countries,  made  an  important  declaration  of  policy. 
With  reference  to  the  claims  of  British  subjects  against  any  state 
"it  is  entirely  a  question  of  discretion  with  the  British  government 
and  by  no  means  a  question  of  international  right  whether  they 
should  or  should  not  make  the  claims  a  matter  of  diplomatic  nego- 


534        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

tiation.  For  the  British  government  has  considered  that  the  losses 
of  imprudent  men,  who  have  placed  mistaken  confidence  in  the 
faith  of  foreign  government,  would  prove  a  salutary  warning  to 
others,  and  would  prevent  any  other  foreign  loan  from  being 
raised  in  Great  Britain,  except  by  governments  of  known  good 
faith  and  of  ascertained  solvency.  But,  nevertheless,  non-payment 
of  interest  upon  loans  made  by  British  subjects  to  foreign  govern- 
ments might  become  so  great,  that  it  might  become  the  duty  of 
the  British  government  to  make  these  matters  the  subject  of 
diplomatic  negotiation."  This  ambiguous  note  was  interpreted 
both  in  favor  of  and  in  opposition  to  intervention.  A  clearer  state- 
ment on  intervention  was  made  in  187 1  by  Lord  Granville, 
Secretary  for  Foreign  Affairs,  in  a  letter  to  the  Secretary  of  the 
Council  for  the  Foreign  Bondholders,  to  the  effect  that  "Her 
Majesty's  government  will  be  at  all  times  ready  to  give  their 
unofficial  support  to  bondholders  in  the  prosecution  of  their  claims 
against  defaulting  states.  But  the  party  must  not  expect  that 
forcible  measures,  such  as  reprisals  and  still  less  any  of  a  more 
warlike  character,  will  ever  be  resorted  to  by  Her  Majesty's  govern- 
ment in  support  of  their  claims."  ^'^  A  select  committee  of  the 
House  of  Commons  appoiiiied  to  look  into  the  matter,  reported 
(July  29,  1875)  in  favor  of  greater  publicity  rather  than  of  inter- 
vention. Finally,  Premier  Campbell-Bannerman  (February  17, 
1903)  at  the  time  of  the  intervention  in  Venezuela,  took  the  stand 
that  foreign  capitalists  investing  in  Venezuela  knew  the  risks 
involved,  but  expected  big  profits,  and  therefore  they  could  not 
expect  that  the  government  would  support  incautious  and  inex- 
perienced capitalists  in  every  foreign  venture. 

The  French  government,  on  the  other  hand,  was  active  in 
supporting  the  foreign  investments  of  its  nationals.  In  1869 
France  intervened  in  Tunis  to  satisfy  French  creditors.  She 
attempted  to  intervene  in  Mexico  in  1861,  in  violation  of  the 
Monroe  Doctrine,  and  was  opposed  by  the  United  States.  In 
1894  France  threatened  to  break  off  diplomatic  relations  with 
Portugal  if  the  rights  of  French  creditors  were  not  respected.  For 
seven  years  a  breach  of  diplomatic  relations  between  France  and 
Venezuela  was  maintained,  because  French  creditors  had  been 
defrauded.    Yet  as  far  back  as  1823  a  royal  decree  was  issued  in 

"Fillimore,   Commentaries    Upon   International   Law.     London:   1882, 
p.  »3. 


NATIONAL   BANKRUPTCIES   IN  THE   NINETEENTH   CENTURY      535 

opposition  to  government  Intervention  to  collect  private  debts. 
Other  measures  were  put  into  efFect  in  France.  The  Minister 
of  Foreign  Affairs  since  1889  has  influenced  the  issue  of  foreign 
securities.  For  instance,  Hungarian  and  German  loans  were  poli- 
tically objectionable  and  in  1911  plans  for  underwriting  them  were 
abandoned  by  French  bankers.  In  the  same  year  members  of  the 
Chamber  of  Deputies  objected  to  the  issue  of  a  new  Paraguayan 
loan  until  the  old  had  been  paid.  The  French  government  paid 
interest  in  default  on  Russian  bonds  from  the  time  of  the  Bolshevik 
Revolution  until  January  i,  1921.  The  refusal  to  trade  with  Soviet 
Russian  was  based  on  its  repudiation  of  debts  of  the  Czarist  regime. 
In  the  nineteenth  century  intervention  was  practiced  by  the 
great  powers  against  small  powers  but  never  against  equals. 
Apparently,  there  is  a  presumption  of  ulterior  motives.  The  right 
to  intervene  is  not  admitted,  or  else  is  restricted  to  very  narrow 
limits,  such  as  for  example  when  internal  creditors  are  favored  as 
against  external  creditors.  Neither  citizens  of  a  state  nor  alien 
creditors  have  any  recourse  to  law  in  cases  of  national  bankruptcy. 
The  French  attempt  to  bring  delinquent  foreign  debtors  before  a 
French  court  failed.  Intervention  by  the  state  of  which  the 
creditors  are  nationals  is  justified  as  little  in  the  case  of  a  foreign 
debtor  state  as  in  the  case  of  a  foreign  private  debtor.  Inter- 
vention by  one  foreign  state  abridges  the  rights  of  the  creditor 
nationals  of  other  foreign  states.  External  creditors  have  no  superior 
claims  over  internal  creditors.  The  only  safeguards  for  the  investor 
are  the  examination  of  the  risks  and  the  responsibility  of  the  banker 
who  recommends  the  foreign  securities.  The  rate  of  interest  and 
other  terms  of  the  loan  are  fixed  after  investigating  the  financial 
conditions  of  the  foreign  borrowing  state.  Although  intervention 
is  a  questionable  right  at  best,  guarantor  states  may  justifiably 
intervene  because  the  guaranteed  state  in  default  surrendered  its 
sovereignty  upon  the  acceptance  of  the  guarantee.  Short  of  military 
force  there  are  few  effective  means  of  intervention.  Protests  are 
ineffective.  Exclusion  from  the  stock  exchange  is  hardly  less  so. 
Tariff  discriminations  lead  to  reprisals.  The  cessation  of  diplo- 
matic relations  by  the  government  of  the  creditors  may  prove  a 
boomerang,  because  rival  nations  profit.  The  arrest  of  persons, 
the  seizure  of  property,  blockade,  the  landing  of  troops  m.ay  all 
be  interpreted  as  acts  of  war,  and  the  results  may  be  worse  than 
the  loss  of  funds  of  the  debtor. 


536        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


iii.  Protective  Committees 

Voluntary  organizations  for  the  purpose  of  protecting  foreign 
creditors  are  rather  recent.  In  form  they  are  both  temporary  and 
permanent.  The  London  Corporation  of  Foreign  Bondholders 
was  established  in  1868,  as  a  private  organization.  It  was  reorgan- 
ized in  1898  and  the  government  was  given  representatation  on 
its  board.  Of  the  seven  members  annually  replaced  two  are 
appointed  by  London  bankers,  three  by  the  original  private  council 
of  foreign  bondholders,  which  preceded  the  Corporation,  and  two 
by  the  Board  of  Trade.  The  Corporation  represents  the  interest 
of  creditors  in  debtor  states,  and  represents  creditors  holding  over 
1000  million  pounds  sterling  of  foreign  obligations.  A  committee 
is  formed  for  each  security  admitted  and  annual  reports  are  issued 
covering  each  one. 

In  France  a  body  similar  to  the  London  Corporation  was 
formed.  The  Association  Nationale  des  Porteurs  des  Valeurs 
Etrangers,  of  Paris,  was  created  in  1898  by  members  of  the  Paris 
Stock  Exchange  with  the  support  of  the  French  Ministry  of 
Finance.  In  1913  the  name  was  changed  to  Office  National  des 
Valeurs  Mobilieres  and  the  scope  of  the  organization  was  extended 
to  include,  not  only  French  creditors,  but  all  creditors,  and  not 
only  external  securities,  but  even  internal  loans  bought  by  other 
than  the  nationals  of  the  issuing  country.  Like  the  London  Cor- 
poration, the  French  body  issues  an  annual  review  of  the  finances 
of  the  defaulting  states. 

In  1899  a  temporary  protective  committee  for  the  holders  of 
Spanish  internal  loans  was  formed  in  Germany.  Its  functions  were 
subsequently  taken  over  by  a  permanent  body,  called  Deutsche 
Treuhand  Gesellschaft.  This  body  is  a  voluntary  organization 
and  looks  after  only  such  cases  as  are  entrusted  to  it.  Plans  for  an 
international  association  of  protective  committees  were  put  forward 
by  the  president  of  the  French  committee.  An  international  agree- 
ment between  these  protective  committees  would  make  it  possible 
to  compel  delinquent  states  to  live  up  to  their  obligations.  Uni- 
form international  rules  for  admission  of  state  loans  to  the  stock 
exchanges  of  the  several  countries  might  be  the  means  for  effecting 
payment. 


NATIONAL   BANKRUPTCIES   IN   THE   NINETEENTH  CENTURY      537 

Iv.  International  Financial  Control 

International  financial  control  of  weak  states  was  established 
during  the  past  century  in  the  case  of  Greece,  Turkey  and  Egypt. 
The  first  case  of  international  financial  control  was  that  of  Tunis, 
which  ceased  to  pay  interest  on  the  national  debt.  In  1869  Prussia, 
France,  England,  and  Italy  undertook  supervision  of  the  finances 
of  Tunis,  and  after  a  composition  with  the  creditors,  control  was 
abandoned  in  1899.  Similar  international  supervision  was  set  up 
in  1876  over  Egypt  by  Germany,  France,  Great  Britain,  Italy, 
and  Austria-Hungary.  The  Khedive  proclaimed  the  decree  of 
which  the  important  provisions  follow:  A  liquidation  commission 
was  set  up  and  recognized.  It  was  to  determine  which  of  the 
financial  revenues  should  be  put  at  the  disposal  of  the  holders  of 
the  national  debt.  All  sums  collected  above  this  amount  were  to 
revert  to  the  Egyptian  government.  The  commission  was  to  be 
dissolved  after  the  final  settlement.  International  control  was  also 
established  over  Greece.  Under  the  Monroe  Doctrine  the  United 
States  took  control  of  the  finances  of  Santo  Domingo,  to  prevent 
European  countries  from  doing  so. 

v.  International    Court 

International  cooperation  in  the  regulation  of  foreign  loans 
dates  back  about  a  generation.  The  International  Statistical  Insti- 
tute in  the  90's  investigated  the  question  of  foreign  loans,  showed 
the  extent  to  which  foreign  states  did  not  live  up  to  their  obliga- 
tions, and  recommended  measures  to  prevent  further  default.  An 
international  congress  on  securities  met  in  Paris  in  1900  but  did 
not  attain  any  practical  result.  An  international  court  for  settling 
disputes  due  to  bankruptcies  was  suggested  in  1875  at  the  Congress 
for  the  Reform  of  International  Law.  At  the  Berne  Peace  Con- 
ference of  1902  a  proposal  was  made  that  loans  to  foreign  states 
contain  a  clause  whereby  the  borrowing  state  would  agree  to  abide 
by  the  decision  of  a  judicial  body  to  be  created.  However,  no 
practical  result  came  of  it.  Seventeen  American  countries  signed 
an  agreement  in  Mexico  in  1902  for  the  adjudication  of  disputes 
arising  out  of  financial  claims.  This  agreement  was  renewed  at 
the  Third  Pan-American  Congress  in  Rio  de  Janeiro  in  1 906,  and 
extended  through  191 2.    At  the  First  Hague  Conference  in  1899, 


538        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  question  of  the  adjustment  of  international  financial  claims 
arose,  but  as  a  result  of  the  reservations  concerning  national  honor 
and  vital  interests  the  conference  achieved  no  result  in  this  field. 
The  Second  Hague  Conference,  convened  in  1907,  was  more 
effective.  After  some  discussion,  a  proposal  was  accepted,  which 
provided  among  other  things  that  the  contracting  powers  agreed 
to  refrain  from  the  use  of  force  for  the  collection  of  contractual 
debts,  unless  the  debtor  refused  an  offer  of  arbitration,  or  else  did 
not  carry  it  out.  An  international  court  might  settle  questions 
concerning  the  amount  of  the  debt,  the  origin  of  the  claim  and 
the  time  and  mode  of  payment.  In  other  words  a  debtor  might 
invoke  legal  proceedings  and  thus  limit  the  use  of  force  by  the 
creditors.  The  Hague  Agreement  of  1907  to  limit  the  use  of 
force  in  the  collection  of  international  debts  was  not  signed  by 
Germany  and  signed  with  reservations  by  the  United  States.  The 
defect  of  the  Hague  Agreement  was  that  it  did  not  provide  for  the 
execution  of  the  decisions  of  the  Hague  Court.  Therefore  the 
last  resort  of  a  defrauded  creditor  was  the  use  of  military  force. 
During  the  very  sessions  of  the  Hague  Conference  at  which 
Venezuela  offered  proposals  to  limit  intervention,  she  refused  to 
repay  a  loan  of  10  million  francs  which  she  owed  to  Belgium. 

The  Covenant  of  the  League  of  Nations  provides  both  for  a 
court  and  for  the  enforcement  of  its  decisions.  In  view  of  the  fact 
that  many  bankruptcies  are  inevitable  after  the  World  War,  the 
laws  governing  international  finance  must  be  developed  and  pro- 
vision made  for  the  adjudication  of  the  many  questions  resulting 
from  the  extensive  inter-governmental  loans,  contracted  during  the 
war. 


CHAPTER  XV 

THE  INTER-ALLIED  DEBTS— SHALL  THEY  BE 
CANCELED? 

A.  Historic  Experience 

Publicists  in  several  countries  of  Europe  have  advocated  that 
the  United  States  government  should  cancel  the  war  debt  that 
the  Allies  owe  to  it.  As  a  precedent  for  this  procedure,  it  is  said 
that  England  canceled  the  indebtedness  of  her  allies  after  the 
Napoleonic  wars. 

The  parallel  is  not  an  exact  one.  The  total  advanced  in 
loans,  subsidies  or  other^vise  to  states  allied  with  England  in  the 
Napoleonic  wars  was  .£57,153,819.  These  advances  were  made 
to  Portugal,  Russia,  Spain,  Austria  and  the  German  states  from 
1793  to  1817.'-  The  total  amount  loaned  to  Austria  from  1794 
onward  was  about  £6,000,000,  and  claims  against  her  were  pressed 
by  Great  Britain  for  seven  years  after  the  close  of  the  war. 
Austria  refused  to  pay,  offering  various  excuses.  On  November 
17,  1823,  twenty-nine  years  after  she  obtained  her  first  loan, 
Austria,  after  much  haggling,  agreed  to  pay  into  the  British 
treasury  in  full  settlement  of  her  debt,  £2,500,000,  about  42  per 
cent  of  the  principal,  or  11  per  cent  of  the  principal  and  interest. 
She  effected  the  settlement  by  borrowing  the  amount  from  private 
bankers,  the  Barings  and  Rothschilds.^ 

What  are  the  differences  between  the  inter-Allied  debts  after 
the  Napoleonic  wars  and  after  the  World  War?  In  the  Napo- 
leonic wars  the  main  quarrel  v/as  between  Great  Britain  and 
France;  in  the  World  War  the  main  quarrel  certainly  was  not 
between  the  United  States  and  Germany.  It  concerned  the 
United  States  directly  less  than  any  of  the  European  powers. 
In  the  Napoleonic  wars  Great  Britain  by  subsidies  induced  her 

^Levi,  Leone,  History  of  British  Commerce.  London:  John  Murray, 
1872,  p.  99.  For  details  as  to  foreign  loans  and  subsidies  see  Porter, 
Progress  of  the  Nation,  vol.  II,  p.  335. 

^Barker,  J.  Ellis,  The  Nineteenth  Century,  Aug,  1919,  p.  382. 

539 


540        INTERNATIONAL    FINANCE   AND   ITS    REORGANIZATION 

allies  to  join  her;  in  the  World  War  the  United  States  was 
urged  to  enter  by  the  powers  to  whom  she  made  loans.  One 
hundred  years  ago  it  was  still  the  custom  to  hire  mercenary  troops; 
in  the  World  War  there  were  none.  During  the  Napoleonic  wars 
Great  Britain  advanced  subsidies  in  part  to  her  allies;  these  were 
not  intended  to  be  repaid.  During  the  World  War  the  advances 
by  the  United  States  government  were  regarded  as  loans,  for 
which  the  borrowers  gave  their  formal  obligations. 

But  the  relative  size  of  the  debts  constitutes  the  clearest  dis- 
tinction between  the  two  wars.  Including  taxes  raised  the  total 
cost  to  England  of  the  23  years  of  war  with  France  was  under 
£1200  million.  The  total  debt  before  the  Napoleonic  wars  was 
£244  million  and  after  them  £885  million.  The  increase  of  the 
debt  due  to  the  wars  was  £641  million.^  Loans  and  subsidies  to 
foreign  powers  amounted  to  about  £57  million,  or  8.9  per  cent  of 
the  total  war  debt.  The  total  military  and  civil  expenditures 
during  the  23  years  amounted  to  £1117  million  and  the  net  mili- 
tary expenses  to  £950  million.  The  loans  and  subsidies  to  foreign 
pov/ers  constituted  6.0  per  cent  of  the  military  expenses. 

What  are  the  analogous  figures  for  the  World  War?  The 
pre-war  debt  of  the  United  States  was  1208  million  dollars.  In 
August,  1919,  the  debt  was  at  its  maximum,  or  26,597  million 
dollars.*  The  war  debt  was  therefore  25,389  million  dollars. 
On  November  15,  1920,  according  to  the  report  of  the  Secretary  of 
the  Treasury,  the  total  loans  to  the  Allies  were  10,813  million  dol- 
lars, consisting  of  net  cash  advances,  less  repayments,  of  9466  mil- 
lion dollars,  unpaid  interest  of  700  million  dollars,  surplus  supplies 
sold  on  credit  by  the  War  Department  of  563  million  dollars, 
and  advances  for  relief  of  84  million  dollars.  The  advances  to 
foreign  governments  by  the  United  States  during  the  World  War 
constituted  43.0  per  cent  of  its  total  war  debt,  as  contrasted  with 
8.9  per  cent,  the  British  figure  for  the  Napoleonic  wars.  The 
net  cost  to  the  United  States  of  the  World  War  was  33,455 
million  dollars.^  Advances  to  foreign  governments  by  the  United 
States  during  the  World  War  constituted  32.6  per  cent  of  the 
total  war  cost,  in  contrast  with  6.0  per  cent,  the  corresponding 
British  figure  in  the  Napoleonic  wars. 

•Bastable,  C.  F.,  Public  Finance.     Hirst,  F.  W.,  Credit  of  the  Nations. 
Hamilton,  Robert,  An  Inquiry  Into  the  Public  Debt. 
*  Report  of  the  Secretary  of  the  Treasury,  1920,  p.  23. 
'Treasury  report,  idem,  p.  105. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?        54I 

The  ratio  of  British  advances  to  total  war  debt  in  the  Napo- 
leonic wars  was  about  one-fifth  of  the  ratio  of  the  United  States 
advances  to  her  total  war  debt  in  the  World  War.  But  Great 
Britain  pressed  for  repayment  and  secured  partial  reimbursement 
seven  years  after  the  close  of  the  Napoleonic  wars. 

Those  who  attempt  to  justify  the  inordinate  indemnity  imposed 
upon  Germany  find  no  parallel  in  the  post-Napoleonic  period. 
The  indemnity  imposed  upon  France  after  the  Napoleonic  wars 
was  only  £28  million.  Yet  the  debt  of  victorious  England  in  181 7 
was  £848  million  and  the  national  debt  of  France  was  only  £140 
million.*^  Prussia  had  paid  to  Napoleon  in  levies,  between  1806 
and  1 812,  more  than  twice  the  amount  of  the  total  indemnity  and 
she  therefore  objected  to  the  moderate  terms  imposed  upon  France. 
England's  moderate  policy  lOO  years  ago  was  sound. ^  Unfor- 
tunately, in  the  ill-timed  election  after  the  armistice  ending  the 
World  War,  Lloyd-George  rode  to  victory  on  the  passions  of  the 
mob,  and  promised  to  "hang  the  Kaiser"  and  "to  make  Germany 
pay  to  the  last  penny  the  cost  of  the  war,"  the  latter  an  utterly 
impossible  undertaking. 

With  respect  to  the  cancellation  of  the  debt  and  the  imposition 
of  an  enormous  indemnity  upon  the  defeated  power,  the  Napo- 
leonic wars  afford  no  precedent  for  the  policies  proposed  after 
the  World  War.  However,  history  does  afford  numerous  cases 
of  repudiation  of  international  indebtedness,  both  public  and  pri- 
vate. 

B.  The  Extent  of  the  Debt 

The  total  cash  advances  by  the  United  States  to  the  Allies 
up  to  November  15,  1920,  amounted  to  9466  million  dollars.  Of 
this  amount  about  2400  million  dollars  was  advanced  after  the 
signing  of  the  armistice.^  Advances  by  the  United  Kingdom  up 
to  March  31,  1920,  amounted  to  9251  million  dollars  gross,  or 
deducting  borrowings  from  the  United  States  of  4197  million 
dollars,  the  net  advances  by  the  United  Kingdom  were  5054  million 
dollars.    The  advances  of  France  to  her  allies  amounted  to  1582 

'Mulhall,  Dictionary  of  Statistics,  4th  Edition,  pp.  260  and  699. 

'Clapham,  J.  H.,  Europe  after  the  Great  Wars,  1816-1920.  Economic 
Journal,  No.  120:   423-435,  December,  1920. 

*  Exhibit  27,  p.  340,  Exhibit  25,  p.  330,  and  letter  of  Secretary  Glass 
Jan,  28,  1920,  to  Homer  L.  Ferguson,  p.  81,  Report  of  the  Secretary  of 
the  Treasury,  1920. 


542        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


million  dollars  up  to  January  i,  1920,  but  her  borrowings  from 
the  United  States  and  Great  Britain  amounted  to  5540  million 
dollars,  leaving  the  net  borrowings  3958  million  dollars.  Except- 
ing these  three  none  of  the  Allied  governments  loaned  money  to 
a  co-belligerent.  The  advances  by  Germany  to  her  allies  amounted 
to  1794  million  dollars,  but  they  are  not  relevant  to  the  present 
discussion. 

Of  the  total  amount  of  loans  by  the  United  States,  about  45 
per  cent  were  advanced  to  Great  Britain,  31  per  cent  to  France, 
and  17  per  cent  to  Italy.  Of  the  gross  loans  of  Great  Britain  31 
per  cent  were  advanced  to  Russia,  28  per  cent  to  France,  and  25 
per  cent  to  Italy.  With  the  exception  of  about  6  per  cent  of 
the  total  loans,  which  were  made  to  the  British  Dominions,  prac- 
tically all  the  British  advances  were  made  to  the  financially  weaker 
Allies.  In  recognition  of  this  fact  Austen  Chamberlain,  Chancel- 
lor of  the  Exchequer,  on  several  occasions  stated  that  Great  Britain 
had  written  off  50  per  cent  of  her  foreign  advances  as  doubtful 
debts. 

Of  the  total  loans  of  France  about  46  per  cent  were  advanced 
to  Russia. 

Inter-Allted  Loans 
(in  million  dollars;  conversions  at  parity) 


To— 


By 

United 
States* 


By 

United 
Kingdom  t 


By 

France § 


Total 


United  Kingdom. 
British  Dominions 

France 

Russia 

Italy 

Belgium 

Servia 

Other  Allies 

Total 


4197 

2966 

188 

1631 

349 

27 
108 


595 

2574 

2840 

2278 

486 

105 

373 


721 

548 

90 

223 


4,197 

595 

5,S4o1[ 

3.749 

3,909 

1,383 

222 

704 


9466 


925it 


1582 


20,299 


•Report  of  the  Secretary  of  the  Treasury,  1920;  includes  advances  up 
to  Nov.  15,  1920. 

t Address  of  the  Chancellor  of  the  Exchequer;  includes  advances  to 
Mar.  31,  1920. 

J  Gross,  or  5054  million  dollars  net  credit. 

§  Statesmen's  Year  Book,   1920,   p.   839. 

U  Gross,  or  3958  million  dollars  net  debit 


THE  INTER-ALLIED  DEBTS— SHALL  THEY  BE  CANCELED?       543 

This  tabulation  indicates  that  the  United  States  is  a  creditor 
only,  and  that  Great  Britain  and  France  are  both  debtors  and 
creditors,  the  former  being  a  creditor  on  net  balance,  the  latter 
a  debtor.  All  the  other  Allies  are  debtors.  The  inter-Allied 
loans  amount  to  20,299  million  dollars  gross  or  14,520  million 
dollars  net. 


C.  Types  of  Proposals 

The  proposals  for  clearing  the  Allied  debts  and  for  liquidating 
them  jointly  date  back  to  the  autumn  of  191 7,  when  Edmond 
Thery  published  his  proposals  in  the  Economiste  Europeen.  A 
few  months  thereafter  Professor  Charles  Gide  of  the  University 
of  Paris  proposed  a  financial  unity  of  front,  and  the  use  of  a  com- 
mon purse  by  all  the  Allies.^  The  proposed  methods  of  liquida- 
tion varied  from  payment  of  principal  only  and  cancellation  of  the 
interest,  to  redistribution  of  all  debts,  including  domestic  loans, 
in  proportion  to  the  wealth  or  population  of  the  belligerents. 
Under  this  plan,  in  addition  to  cancellation  of  inter-government 
advances,  the  stronger  nations  would  have  to  bear  part  of  the 
internal  debt  of  the  weaker — an  application  of  Bolshevism  to  the 
wealth  of  nations. 

i.  Partial  Cancellation 

(a)   Cancellation  of  Interest  and  Payment  of  Principal — 

A  moderate  suggestion  for  reducing  the  burden  of  the  foreign 
debt  was  made  by  Jean  Herbette,  '^^  to  the  effect  that  the  lending 
states  should  refrain  from  charging  any  interest  on  the  advances 
and  that  the  capital  should  be  repaid  by  annuities  distributed 
over  a  long  period  of  years.  The  £500  million  due  to  Great 
Britain,  for  instance,  would  be  paid  in  thirty  annual  installments 
of  £17  million.  This  proposal  really  involved  a  cancellation  of 
50  per  cent  of  the  principal,  for  the  present  worth  of  30  annual 
payments  of  £17  million  at  5  per  cent  would  be  £260  million,  or 
about  half  of  the  amount  due.^^     The  proposal  was  intended  to 

*La  Revue  d'Economie  Politique,  February,  1918. 

^'' Temps,  July  3,  1920. 

"  Sayous,  Andre,  Proposals  for  the  Improvement  of  the  Financial 
Situation  in  France,  Paper  No.  XII  International  Financial  Conference, 
p.  80,  Le  Temps,  July  3,  1920.    Economic  Reviev?,  July  i6,  1920. 


544        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

apply  to  the  British  advances  in  the  expertation  that  "Great  Brit- 
ain's consent  would  create  a  precedent  that  the  United  States 
could  hardly  fail  to  follow." 


(b)    Cancellation  of  Loans  to  France — 

Although  the  French  have  repeatedly  proposed  methods  of 
reducing  the  burden  of  the  inter-Allied  debt  they  never  suggested 
cancellation  of  the  French  debt  alone.  "At  the  present  time 
France  is  deeply  anxious  concerning  her  war  debts  to  her  Allies. 
She  is  astonished  that  the  powers  who  shared  the  struggles  with 
her  do  not  propose  some  arrangement  in  which  both  past  and 
future  are  to  be  taken  into  account."  ^^  The  proposal  to  cancel 
the  French  debt  alone  was  made  by  an  American,  Pierrepont  B. 
Noyes,  formerly  American  Commissioner  in  the  Rhinelands.  His 
proposal  was  baldly,  "Forgive  France  all  the  debts  she  owes  the 
United  States  as  a  result  of  the  war."  He  did  not  urge  the 
cancellation  of  Italy's  debt  to  the  United  States,  which  is  about 
55  per  cent  of  the  French  debt.  If  the  extent  of  war  damage 
is  to  be  taken  into  account  the  debts  of  Italy  and  Servia  should 
be  remitted  as  well.  Furthermore,  he  objected  to  the  cancellation 
of  the  British  loan,  on  the  ground  that  Great  Britain  had  obtained 
advantages  from  the  war.  If  advantages  gained  as  a  result  of 
borrowing  in  the  United  States  offset  the  debt  to  the  United 
States,  the  denial  of  the  favor  to  Britain  applies  with  little  less 
force  to  France.  If  "the  threat  to  Great  Britain's  carrying  trade 
has  been  removed"  the  threat  to  France's  industry  has  likewise 
been  abolished.  If  "the  removal  of  German  intrigue  frorrt  the 
politics  of  the  Near  East  has  relieved  Britain's  anxiety  for  the 
safety  of  India,"  the  dissipation  of  the  German  colonial  possessions 
has  removed  the  challenge  to  French  claims  in  Morocco.  The 
advantages  of  proximity  and  sympathy  which  Mr.  Noyes  thought 
essential  in  judging  the  claims  of  the  European  powers  may  be 
offset  by  the  advantages  of  detachment  and  calm  judgment  enjoyed 
by  most  Americans.  The  mere  statement  of  the  discrimination 
between  the  nations  makes  the  proposal  impolitic,  impracticable 
and  unjust.^^ 

"Brussels  Financial  Conference,  Paper  XII,  p.  80. 

"Noyes,  P.  B.,  While  Europe  Waits  for  Peace,  1921.  New  York: 
Macmillan  &  Co. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?   545 

(c)   Partial  Cancellation  of  Loans  by  Great  Britain — 

The  suggestion  has  been  made  that  Great  Britain  might  cancel 
the  debts  which  her  allies  owe  her  for  munitions  bought  in  Great 
Britain,  while  retaining  their  liability  for  sums  loaned  through 
Great  Britain  by  the  United  States.  In  other  words,  this  proposal 
contemplates  that  Great  Britain  should  cancel  that  portion  of  the 
debt  which  was  not  offset  by  advances  from  the  United  States.^ 

In  view  of  the  fact  that  Great  Britain  considers  that  of  her 
total  loans,  equivalent  to  9250  million  dollars,  one-half  the  amount 
has  been  written  off  and  in  view  of  the  fact  that  her  indebtedness 
to  the  United  States  amounts  to  4197  million  dollars,  this  pro- 
posal would  involve  either  a  cancellation  of  the  worthless  portion 
of  the  debt  or  else  the  cancellation  of  the  entire  debt.  Further- 
more, since  the  2800  million  dollars  loaned  to  Russia  is  hardly 
collectible,  this  proposal  would  not  relieve  France  of  her  debt  to 
Great  Britain,  amounting  to  2600  million  dollars. 

ii.  Redistribution  of  the  Debts 

The  suggestions  for  the  redistribution  of  the  debt  vary  from 
the  rather  modest  proposal  to  offset  Britain's  borrowings  by  Britain 
loans  to  the  extreme  and  impossible  scheme  of  pooling  all  the 
Allied  debts,  internal  and  external. 

(a)   Offsetting  Britain's  Borrowings  and  Debts — 

In  September,  191 8,  British  statesmen  were  calling  attention 
to  the  fact  that  the  United  States  was  making  advances  to  Great 
Britain,  which  the  latter  in  turn  loaned  to  the  other  Allies.  It 
was  then  also  suggested  that  America  make  direct  advances  to 
the  continental  Allies,  and  that  Britain's  virtual  endorsement 
should  be  unnecessary,  on  the  correct  assumption  that  the  war  was 
not  the  affair  of  Britain  alone,  but  rather  in  the  common  interest, 
and  that  the  burden  could  not  be  specifically  allocated  to  her.  Up 
to  the  end  of  19 17,  of  a  total  of  3656  million  dollars  loaned  by 
the  United  States,  Great  Britain  received  i860  million  dollars. 
In  the  first  half  of  1918,  of  a  total  of  1968  million  dollars  advanced, 
Great  Britain  received  121 5  million  dollars.     However,  from  July 

"Suggestion  of  F.  C.  Goodenough,  Chairman  of  Barclay's  Bank,  at 
the  annual  meeting,  Jan.  26,  1921.  Cable  dispatch  to  Journal  of  Com- 
merce, Jan.  27,   1 92 1. 


546        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

I,  1918,  to  November  30,  1918,  an  increasing  share  was  extended 
directly  to  other  countries.  Of  a  total  of  1672  million  dollars 
in  cash,  only  721  million  dollars  was  advanced  to  Great  Britain 
and  511  million  dollars,  for  example  to  Italy.  After  the  armistice 
the  amount  advanced  to  countries  other  than  Great  Britain 
increased  greatly.  In  the  seven  months  ending  June  30,  I9I9> 
France  received  407  million  dollars,  Italy  382  million  dollars,  and 
Great  Britain  only  371  million  dollars,  and  in  the  sixteen  months 
ending  November  i,  1920,  the  United  States  advanced  in  cash  331 
million  dollars  to  France,  and  75  million  dollars  to  Italy,  while 
Great  Britain  repaid  80  million  dollars.^^  The  attitude  of  the 
British  statesmen  in  19 18  led  to  certain  proposals  made  in  1919, 
when  a  plan  was  put  forward  providing  for  the  payment  of  Great 
Britain's  debt  to  the  United  States  with  an  equivalent  amount  of 
Allied  government  securities  held  by  Great  Britain.^*' 

In  192 1  Sir  J.  C.  Stamp,  the  British  statistician,  proposed  that 
the  United  States  take  over  Europe's  debt  to  Great  Britain,  on 
the  ground  that  if  the  United  States  had  entered  the  war  earlier 
she  would  probably  have  loaned  directly,  rather  than  through 
Great  Britain,  and  further  that  the  United  States  could  collect 
more  easily  from  Europe  because  of  her  political  aloofness.  How- 
ever, neither  the  hypothesis  nor  the  prophecy  carried  sufficient  con- 
viction to  justify  the  proposal  to  Americans.^'^ 

(b)  The  Exchange  of  Inter-Allied  Debts  for  German  Indernn'tty 
Bonds — 

The  proposal  to  have  Germany  liquidate  the  inter-Allied 
indebtedness  was  made  by  Professor  Charles  Gide.^^  According 
to  him  "the  Entente  countries  ought  to  guarantee  the  indemnity 
to  be  paid  by  Germany,  which  in  the  form  of  bonds  would  be 
issued  to  the  devastated  countries  to  be  negotiated  by  them.  By 
this  means  all  countries,  those  guaranteeing  the  bonds  as  well  as 
those  devastated,  would  have  a  common  interest  in  the  early 
recovery  of  Germany." 

Mr.  O.  T.  Crosby,  Assistant  Secretary  of  the  Treasury  of  the 

*®  Exhibits  28  to  32,  pp.  340-347,  Treasury  Report,  1920. 
"Associated  Press  dispatch,  London,   Dec.  9,   1919. 
"London  dispatch,  Chicago  Tribune,  Jan.  7,   1921. 
"In  his  Paper  XIII    (5),  Brussels  Financial  Conference,  dated  July 
12,   1920. 


THE  INTER- ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       547 

United  States  during  the  war,  made  a  similar  proposal.''''  He  sug- 
gested that  German  indemnity  bonds  be  taken  bj'  the  United  States 
in  exchange  for  its  war  loans  to  the  Allies.  In  addition  he  sug- 
gested the  clearing  of  all  inter-Allied  debts.  Anj'  residue  of  obliga- 
tions held  by  one  national  treasury  against  another  was  to  be 
offered  to  private  investors  throughout  the  world  without  recourse. 
The  advantage  claimed  was  that  the  world-wide  distribution  to 
private  investors  would  remove  the  dangers  inhering  in  inter-gov- 
ernmental loans.  The  proposal  was  complicated.  It  was  doubtful 
whether  a  wide  distribution  of  the  bonds  could  be  effected,  for 
few  of  the  impoverished  countries  of  Europe  could  buy  them. 
Finally,  either  the  indemnity  bonds  were  good  or  they  were  not. 
If  they  were  the  Allied  powers  could  sell  them  and  liquidate  their 
debts  to  the  United  States.  If  the  indemnity  bonds  were  not 
good,  the  United  States  should  not  be  asked  to  take  them.  The 
proposal  to  convert  the  Allied  debts  to  the  United  States  into 
small  bonds  and  to  distribute  them  to  private  investors  was  charac- 
terized as  "fatuous  and  impracticable"  by  Secretary  Houston. ^° 

(c)   Pooling  of  the  War  Debts — 

The  pooling  of  the  war  debts  and  their  repayment  out  of  taxes 
levied  upon  all  the  belligerents,  or  as  some  suggest,  upon  all  the 
countries  of  the  world,  in  proportion  to  their  wealth  or  popula- 
tion, would  place  a  burden  upon  the  United  States  even  greater 
than  the  cancellation  of  the  Allied  debts. 

I.  French  proposals — In  the  autumn  of  191 7  M.  Edmond 
Thery  proposed  ^^  that  the  Allied  nations,  poor  and  rich,  should 
by  a  single  joint  operation  liquidate  all  the  financial  obligations 
incurred  since  the  beginning  of  the  war.  Such  a  joint  loan  would 
aid  in  stabilizing  financial  conditions  and  uniting  the  Allies  after 
the  war.  In  February,  1918,  Professor  Charles  Gide  appealed  for 
a  financial  Entente  after  the  war.--  After  the  armistice,  a  pro- 
fusion of  schemes  was  put  forward  in  France  with  the  object  of 

^°  Crosby,  O.  T.,  International  Governmental  Loans,  Annals  Acad. 
Pol.  &  Soc.  Sci.,  May,  1920,  No.  178,  pp.  231-233. 

^Treasury  Report,  1920,  p.  64. 

"  L'Econoraiste  European,  Sept.  14,  1917.  London  Economist,  Sept.  22, 
1917. 

="  Op.  cit. 


548        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

transferring  to  the  stronger  Allies  the  burden  of  the  war.^'  A 
bill  was  proposed  by  Deputy  Jacques  Stern  to  establish  a  financial 
union  among  the  Allies  and  to  distribute  the  expenses  of  the  war 
among  the  nations  on  a  basis  of  wealth  or  population.  A  loan  of 
518,000  million  francs  was  to  be  distributed  among  the  Allies,  on  the 
basis  of  population  and  production,  and  each  state  was  to  guarantee 
its  proportion  of  the  service  of  the  debt  from  customs  and  other 
revenues.'^  The  annual  charge  for  interest  and  sinking  fund 
would  be  distributed  somewhat  as  follows:  United  States,  6316 
million  francs;  Great  Britain,  2827  million  francs;  France,  2452 
million  francs.  A  somewhat  similar  proposal  was  endorsed  by 
Alexandre  Ribot,  former  Premier  and  Minister  of  Finance.  He 
advocated  that  "arrangements  must  be  made  that  none  of  the  Allies 
should  bear  a  disproportionate  share  of  the  burden.-^'* 

In  the  spring  of  1919,  M.  Thery  reiterated  his  proposals  for 
an  international  loan  guaranteed  by  the  Allies,  from  the  proceeds 
of  which  each  of  the  nations  would  receive  sums  corresponding 
to  the  war  debt  and  damages.-^  This  proposal  was  sponsored  by 
Raoul  Peret,  Chairman  of  the  Budget  Committee  of  the  Chamber 
of  Deputies.  He  said  that  "since  an  internal  loan  was  impossible 
to  float  in  France  what  was  wanted  was  a  financial  league  of 
nations."  -^  The  Committee  on  Peace  Negotiations  of  the 
Chamber  of  Deputies  approved  the  proposal  that  the  Allies  form 
an  inter-Allied  pool  to  reimburse  the  combatants  for  their  war 
expenditures."^ 

Similar  proposals  were  made  by  members  of  the  Chamber  of 
Deputies  Vincent  Auriol,  Andre  Lefevre,  Louis  Dubois,  Builloux- 
Lafant,  Abel  Gardey,  Pierre  Rameil.^* 

"Jeze,  Gaston,  La  Reparation  Equitable  entre  Allies  des  Charges 
Financieres  de  la  Guerre,  Revue  de  Science  et  de  Legislation  Financieres, 
XVII:  4,  pp.  614-641,  Oct.  1919.  A  summary  of  proposals  and  abstract 
of  official  debates. 

"Associated  Press  dispatch,  Paris,  Dec.  15,  1918.  New  York  Times, 
Dec.  17,  1918.  Le  Temps,  Dec.  22,  and  Dec.  29,  1918.  L'Humanite, 
Dec.  29,  1918.    Journal  Officiel,  Chambre,  Debats,  pp.  3679  et  seg. 

*'^  Associated  Press  dispatch,  Paris,  Dec.  31,  1918.  New  York  Tribune, 
Jan.  2,  1919.  Journal  Officiel,  Senat,  Debats,  Dec.  17,  1918,  p.  881,  May 
30,  1919,  Dec.  30.  1919.  pp.  884,  1892. 

*J.  O.  Chambre,  Debats,  p.  1059  et  seg.,  Mar.  7,  1919.  Le  Figaro 
and  London  Financial  Times,  Mar.  lo,  1919. 

"'Associated  Press  dispatches,  Paris,  Feb.  6,  1919,  and  Feb.  28,  1919. 
Commercial  and  Financial  Chronicle,  Mar.  22,  1919. 

"Associated  Press  dispatch,  Paris,  Oct.  6,   1919. 

^J.  O.  Chambre,  Debats,  pp.  1059,  1062,  1071,  1098,  1120,  1135,  1166, 
Mar.  7-13,  1919. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       549 

The  French  position  was  summed  up  by  Prof.  Gaston  Jeze.^^ 

"During  the  war  it  was  proclaimed,  with  numerous  repetitions, 
that  the  Allies  were  pooling  all  their  resources  for  the  common  victory. 
France,  the  least  wealthy  of  the  three  Allies  and  the  most  tried  by 
the  war,  received  financial  help  which,  it  must  be  stated  with  emphasis, 
powerfully  helped  the  Allies  to  win  the  war.  The  unanimous  opinion 
of  Frenchmen  is  that  the  unexampled  sacrifices  of  human  life;  the 
destruction  of  all  kinds  inflicted  upon  the  invaded  regions;  the  com- 
plete stoppage  during  the  four  years  of  war  of  economic  production, 
which  was  entirely  devoted  to  the  war;  the  heavy  tribute  paid  by 
France  to  foreign  ship  owners,  especially  to  the  English — these  fully 
make  up  for  the  money  advances  made  to  her.  The  unanimous  opinion 
of  Frenchmen  is  that  to  compel  France  to  pay  that  foreign  debt  would 
not  only  impose  an  unbearable  burden  upon  her,  but  also  would 
perpetrate  a  serious  injustice.  The  victory  was  won  by  the  common 
effort  of  the  Allies;  the  benefits  and  the  sacrifices  also  must  be  shared 
in  common." 

2.  Italian  proposals — The  French  proposals  for  a  pooling 
of  the  war  debt  and  its  amortization  by  taxes  levied  in  proportion 
to  the  wealth  or  population  of  the  members  of  the  Entente  or  of 
the  world  found  a  ready  response  in  war-stricken  and  impoverished 
Italy.  The  Corriere  della  Sera  of  December  12,  19 18,  contained 
a  proposal  to  pool  the  debt  of  the  Allied  countries  and  to  issue  a 
single  international  loan  guaranteed  by  the  Allied  nations.  The 
paper  naively  claimed  that  the  advantage  of  the  proposal  was  that 
Italy  and  France  would  benefit  by  the  adoption  of  this  principle 
of  justice.  The  Giornale  d'ltalia  of  December  25,  1918,  after 
presenting  the  relevant  statistics  of  national  wealth  and  revenue, 
debt  and  debt  charges,  endorsed  a  similar  proposal.  Professor 
Luigi  Einaudi,  one  of  the  leading  Italian  economists,  sponsored 
this  proposal  and  suggested  an  international  tax  on  the  consumption 
of  raw  materials,  coal,  petroleum  and  cotton,  for  the  amortization 
of  the  contemplated  world  bonds.^°  Luigi  Luzzatti,  former 
premier  of  Italy,  and  an  authority  on  finance,  urged  an  inter- 
national pooling  of  the  debt,  and  the  support  of  Italy  and  the 
weaker  Allies.  The  worth  of  his  proposal  may  be  gauged  by  the 
fact  that  he  recommended  the  unification  of  all  currencies  and  the 
international  support  of  exchange  rates. ^^  An  identical  proposal 
was  endorsed  by  Senor  Crespi,  of  the  Italian  delegation  to  the  Peace 

"The  Economic  and  Financial  Position  of  France  in  1920.     Quarterly 
Journal  of  Economics,  February,  1921,  vol.  XXXV  :i. 
"Corriere  della  la  Sera,  Jan.  10,  1919. 
"Associated  Press  dispatch,  Rome,  Feb.  5,  1919. 


5  so        INTERNATIONAL    FINANCE   AND    ITS    REORGANIZATION 

Conference,  who  pleaded  for  a  unity  of  financial  front  of  all  the 
Allies.32 

3.  British  proposals — During  the  war  a  proposal  for  the 
international  pooling  of  the  debt  was  embodied  in  a  book  "The 
Great  Plan,"  by  E.  A.  Stillwell.  His  plan  was  that  an  inter- 
national bodj'  should  call  for  a  list  of  war  costs  of  the  nations  and 
should  pay  them  with  100-year  world  bonds.  The  inter-Allied 
debt  could  then  be  disposed  of  simply  by  clearing  and  canceling. 
The  world  bonds  would  be  non-interest-bearing  and  would  be 
used  as  currency.  For  the  repaj-ment  of  the  bonds  each  state 
would  contribute  the  savings  effected  in  the  reduction  of  armament 
expenses.  Of  course  this  proposal  was  laughed  out  of  court. 
Inflation  would  have  increased,  international  government  was  non- 
existent, international  taxes  were  not  feasible,  and  disarmament 
on  such  a  basis  was  hardly  possible.^' 

Professor  Jacks,  of  Oxford  University,  editor  of  the  Hibbert 
Journal,  also  sponsored  the  scheme  for  the  international  pooling  of 
the  war  debts,  including  those  of  the  former  enemy  powers.  Each 
nation  was  to  contribute  proportionately  to  the  annual  interest 
and  sinking-fund  charges.^  Unlike  the  French  and  Italian  econ- 
omists and  statesmen  the  British  paid  scant  attention  to  such 
schemes,  with  the  exception  of  R.  P.  Houston,  of  the  House  of 
Commons,  whose  proposal,  unique  among  responsible  Britishers, 
provided  for  the  pooling  of  the  debts  of  the  Allies  "including  the 
United  States."  ^^ 

ill.  Complete  Cancellation  of  the  Inter-Allied  Debts 

The  proposal  to  cancel  all  the  inter-Allied  debts  originated  in 
Great  Britain.  This  plan  is  simpler  and  would  require  less 
administration  than  the  utterly  unworkable  scheme  of  inter- 
nationalizing the  war  debts  and  of  levying  international  taxes. 

(a)   British  Proposals — 

I.  History — During  the  w^ar  the  British  government  sug- 
gested that  the  United  States  make  advances  to  France  and  Italy 

"Associated  Press  dispatch,  Paris,  Feb.  2,  1919. 

"Stillwell,  E.  A.,  The  Great  Plan,  London:  Hodder  &  Stoughton, 
1918. 

^'London  dispatch,  New  York  Tribune,  Feb.  4,   1919. 

"Liverpool  correspondence.  Journal  of  Commerce,  Nov.  19,   1919. 


THE  INTEE-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       55 1 

direct  rather  than  through  the  intermediation  of  Great  Britain. 
The  idea  underlying  this  request  took  another  form  after  the  war. 
The  proposition  to  cancel  all  inter-Allied  debts  was  first  put 
forward  shortly  after  the  armistice  by  Sir  Martin  Conway  in  an 
article  in  the  New  York  Times  and  the  London  Morning  Post. 
During  the  Peace  Conference  in  the  early  part  of  19 19,  the  plan 
was  again  suggested  by  the  financial  experts  of  the  British  delega- 
tion and  the  British  treasury  representatives  also  made  informal 
proposals  to  this  effect.^*^  The  American  delegates  scouted  the 
plan  and  no  formal  request  was  made  by  the  British.  The  idea  was 
revived  in  1920,  during  the  Hythe  and  Boulogne  conferences  of 
the  Allied  premiers.  Lloyd  George,  it  was  reported  from 
Boulogne,  stated  that  the  United  States  had  refused  to  entertain 
the  request  to  cancel  the  advances  to  Great  Britain  subject  to 
British  cancellation  of  her  advances.^^  One  of  the  proposals  at 
the  Hythe  Conference  provided  for  paralleling  the  payment  of 
the  French  debt  to  England  with  German  payments  to  France, 
on  the  condition  that  America  afford  similar  treatment  to  England. 

2.  By  Keynes — John  M.  Keynes,  British  treasury  represen- 
tative at  the  Peace  Conference,  made  a  clear  public  appeal  for  the 
cancellation  of  the  inter-Allied  indebtedness,  as  an  essential  to  the 
future  prosperity  of  the  world.  However,  he  made  the  important 
reservations  that  the  indemnity  should  be  set  at  a  very  moderate 
figure,  7500  million  dollars,  adequate  to  cover  entirely  the  actual' 
cost  of  restoring  the  devastated  areas,  and  that  Great  Britain 
should  waive  altogether  her  indemnity  claims  in  favor  of  Belgium, 
Servia,  and  France.^^ 

3.  By  Horne — Sir  Robert  Home,  president  of  the  Board  of 
Trade,  in  an  interview  in  the  London  Daily  Graphic,  stated  that 
"the  only  solution  of  many  of  the  international  piroblems  was  the 
proposal,  mooted  some  time  ago,  that  Am.erica  should  waive 
England's  indebtedness  upon  the  condition  that  England  did  the 
same  with  the  other  European  countries;  in  a  word,  that  there 
should  be  a  forgiveness  of  debts  all  around."  ^^ 

*"  Associated  Press  dispatches,  Feb.   12,   13,  1921. 

For  presentation  of  the  British  view,  see  Trouton,  R.,  Cancellation  of 
Inter-Allied  Debts.    Economic  Journal,  XXI:i2i,  March,  1921.    pp.  38-46. 

''Paris  dispatch,  New  York  Times,  June  21,  1920. 

■^  Keynes,  J.  M.,  Economic  Consequences  of  the  Peace,  pn.  269-270. 
American  Edition. 

^London  dispatch.  New  York  Times,  Jan.  7,  1921. 


552        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

4.  By  Lloyd  George  and  Chamberlain — ^At  the  Paris  con- 
ference between  Lloyd  George  and  Briand,  for  the  determination 
of  the  amount  of  the  German  indemnity,  Lloyd  George  probably 
expressed  a  Freudian  wish  when  he  said  "Meanwhile  let  us  act 
as  if  the  debts  did  not  exist.  If  the  creditor  does  not  worry  me, 
I  do  not  worry  the  debtor."'*"  One  of  the  factors  determining 
the  high  figure  set  for  the  German  indemnity  was  the  indisposition 
of  the  United  States  to  cancel  the  debt  of  the  Allies.  That  this 
subject  was  uppermost  in  the  minds  of  British  statesmen  was 
evident  from  the  fact  that  after  the  high  figure  for  the  indemnity 
had  been  fixed  Austen  Chamberlain,  Chancellor  of  the  Exchequer, 
publicly  announced  the  fact  that  Great  Britain  had  made  pro- 
posals for  canceling  the  inter-Allied  debts,  but  they  were  not 
acceptable  to  the  government  of  the  United  States.  "In  making 
them  we  sought  no  advantage  for  ourselves;  we  proposed  a  solu- 
tion in  which  we  should  have  forgiven  claims  larger  than  any 
remitted  to  us  and  we  proposed  it  because  we  believed  it  would 
be  in  the  interest  of  good  relations  among  peoples,  the  rehabilita- 
tion of  international  credit  and  the  restoration  of  international 
trade.  Our  great  external  debt  was  due  to  the  obligations  we 
undertook  on  behalf  of  our  allies.  If  we  had  only  ourselves  to 
consider  we  should  be  practically  free  of  external  debt  at  the 
present  time."  *^  Mr.  Chamberlain  said  that  he  would  have  pre- 
ferred at  the  close  of  the  war  that  the  whole  international  debt 
of  the  allied  and  associated  governments  should  have  been  wiped 
out  and  that  all  should  have  started  with  clean  slates. 

As  late  as  September  27,  1921,  and  after  the  1922  budget  had 
provided  for  the  payment  of  interest  on  the  debt  to  the  United 
States  government,  Winston  Churchill  speaking  at  Dundee  of  the 
prospective  disarmament  conference  at  Washington  said,  "It  would 
be  for  the  benefit  of  the  world  if  all  the  international  obligations 
arising  out  of  the  war  were  reconsidered,  reduced  to  practical 
dimensions  and  placed  in  a  category-  by  themselves." 

The  exact  form  of  these  requests  was  revealed  in  testimony  on 
S.2135,  a  bill  introduced  by  Senator  Penrose,  giving  the  Secre- 
tary of  the  Treasury  very  broad  powers  to  negotiate  the  settlement 
of  the  inter-Allied  debts.  Speaking  before  the  Senate  Committee 
on  Finance,  Secretary  Mellon  submitted  a  cablegram,  dated  Febru- 

"  Paris  dispatch  New  York  Times,  Feb.  i,  1921. 
"London  dispatch,  New  York  Times,  Feb.  4,  1931. 


THE  INTER- ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       553 

ary  9>  1920,  from  Austen  Chamberlain,  Chancellor  of  the  Ex- 
chequer to  R.  C.  Leffingwell,  then  Assistant  Secretary  of  the 
Treasury.  It  reads,  "We  should  welcome  a  general  cancellation 
of  the  inter-Governmental  war  debts.  .  .  .  The  existence  of  these 
international  debts  deters  neutrals  from  giving  assistance,  checks 
private  credits  and  will,  I  fear,  prove  a  disturbing  factor  in  future 
international  relations." 

Of  similar  tenor  is  a  letter,  dated  August  5,  1920,  and  ad- 
dressed to  President  Wilson  by  Premier  Lloyd  George.  It  reads, 
"After  great  difficulties  with  his  own  people,  M.  Millerand  .  .  . 
pointed  out  that  it  was  impossible  for  France  to  agree  to  accept 
nothing  less  than  it  was  entitled  to  under  the  treaty,  unless  its 
debts  to  its  Allies  and  Associates  in  the  war  were  treated  in  the 
same*  way.  This  declaration  appeared  to  the  British  Government 
eminently  fair.  But  after  careful  consideration  they  came  to  the 
conclusion  that  it  was  impossible  to  remit  any  part  of  what  was 
owed  to  them  by  France  except  as  part  and  parcel  of  all  around 
settlement  of  inter-Allied  indebtedness.  .  .  .  But  the  principal  rea- 
son was  that  British  public  opinion  would  never  support  a  one- 
sided arrangement  at  its  sole  expense,  and  that  if  such  a  one- 
sided arrangement  were  made,  it  could  not  fail  to  estrange  and 
eventually  embitter  the  relations  between  the  American  and  British 
people  with  calamitous  results  to  the  future  world. 

"You  will  remember  that  Great  Britain  borrowed  from  the 
United  States  about  half  as  much  as  its  total  loans  to  the  Allies, 
and  that  after  America's  entry  into  the  war  it  lent  to  the  Allies 
almost  exactly  the  same  amount  as  it  borrowed  from  the  United 
States.  Accordingly  the  British  Government  has  informed  the 
French  Government  that  it  v/ill  agree  to  any  equitable  arrange- 
ment for  the  reduction  or  cancellation  of  inter-Allied  indebted- 
ness, but  that  such  an  arrangement  must  be  one  which  applies  all 
around.  .  .  . 

"I  should  very  much  welcome  any  advice  which  you  might  feel 
yourself  able  to  give  me  as  to  the  best  method  of  securing  that  the 
whole  problem  could  be  considered  and  settled  by  the  United  States 
Government  in  concert  with  its  associates.  ...  I  should  like  to 
make  it  plain  that  this  (postponement  of  negotiations)  is  due  to  no 
reluctance  on  the  part  of  Great  Britain  to  fund  its  debt,  but  solely 
to  the  fact  that  it  cannot  bind  itself  by  any  arrangement  which 
would  prejudice  the  working  of  any  inter-Allied  arrangement  which 


554        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

may  be  reached  in  the  future.  If  some  method  can  be  found  for 
funding  the  British  debt,  which  does  not  prejudice  the  larger 
question,  the  British  Government  will  be  glad  to  fall  in  with  it." 

(b)   American  Proposals — 

There  were  a  number  of  American  proposals  for  the  cancel- 
lation of  the  debt.  Mr.  Frank  A.  Vanderlip,  in  June,  1919,  pro- 
posed the  remission  of  American  loans  to  France  and  England. 
Ex-Attorney  General  George  W.  Wickersham,  in  a  public  address, 
advocated  a  similar  course.^-  The  liberal  weeklies,  such  as  the 
New  Republic,  advocated  the  cancellation  of  the  debt,  not  on 
financial  grounds  but  for  the  purpose  of  moderating  the  impossible 
claims  of  France  against  Germany. 


D.  The  Objections  to  Cancellation 
i.  American  and  Foreign  Opposition 

During  the  House  hearings  on  the  Victory  Loan  Act  In  the 
early  part  of  1919,  when  it  was  important  that  there  be  no  obstacle 
to  a  successful  flotation,  Albert  Rathbone,  Assistant  Secretary  of 
the  Treasury  in  charge  of  the  Foreign  Loan  Bureau,  told  the 
committee  that  "officials  of  foreign  governments  have  always 
expressed  the  intention  of  their  governments  to  pay  their  indebted- 
ness and  said  that  they  had  no  intention  of  doing  anything  else. 
It  is  true  that  there  have  been  one  or  tvvo  suggestions  by  states- 
men not  holding  any  public  office  that  the  debts  should  be  for- 
given. There  is  no  body  that  can  forgive  these  debts  except  the 
Congress.  The  Treasury  Department  does  not  advocate  and  never 
never  has  advocated  anything  but  the  collection  of  these  debts.'*^ 

With  reference  to  the  proposals  of  the  French  deputies,  Stern 
and  Peret,  and  with  reference  to  the  rumor  that  President  Wilson 
had  been  requested  at  Paris  to  recommend  the  cancellation  of  the 
loans,  the  French  High  Commission  in  the  United  States 
announced  that  "the  Prime  Minister  has  cabled  an  order  to  deny 
most  emphatically  that  such  a  suggestion  had  been  made  to  Presi- 

**  Associated  Press  dispatch,  Oct.  20,  1919. 

"Hearings  on  bill  to  amend  the  Libert>'  Bond  Act,  before  Ways  and 
Means  Committee,  House  of  Rep.  65th  Cong,  ist  Sess.,  Feb.  13,  14,  1919, 
p.  56  ei  seg. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       55$ 

dent  Wilson  by  any  French  official,  and  that  the  French  govern- 
ment had  nothing  whatever  to  do  with  the  project  (of  MM.  Stern 
and  Peret)  and  is  not  giving  its  support  to  the  resolution."  As 
for  the  British,  Mr.  Rathbone  said  they  stated  that  "it  would  be 
unthinkable  that  their  government  should  not  pay  its  debts.  They 
say  they  do  not  want  charity,  that  they  borrowed  the  money  and 
intend  to  pay."^* 

"President  Wilson  and  his  advisers  without  exception,  opposed 
vigorously  and  finally  any  suggestions  of  cancellation,  from  start 
to  the  finish  of  the  Peace  Conference."  ^^  An  official  statement 
on  the  subject  of  the  cancellation  of  the  war  debts  was  contained 
in  a  letter  dated  December  i8,  1919,  from  Secretary  Carter  Glass 
to  Joseph  W.  Fordney,  chairman  of  the  Committee  on  Ways  and 
Means  of  the  House,  in  which  he  said,  "While  the  Treasury  favors 
such  an  arrangement  (funding  of  the  demand  obligations  and  the 
deferring  of  interest  payments)  it  does  not  favor  the  cancellation 
and  indeed  has  no  power  to  cancel  any  portion  of  the  interest  or 
principal."  Another  official  statement  appeared  in  the  report  of 
the  Secretary  of  the  Treasury  for  the  year  1920.  After  stating 
a  number  of  the  variations  of  the  proposal  to  cancel  the  debts, 
giving  the  pros  and  cons,  he  says: 

"I  imagine  neither  of  these  suggestions  will  be  received  with 
favor  by  the  American  taxpayers.  .  .  .  The  suggestion  that  we 
should  throw  them  (the  bonds)  upon  the  market  appears  to  me 
to  be  as  fatuous  and  impracticable  as  either  of  the  other  suggestions. 
.  .  .  The  reasonable  and  proper  course  is  to  proceed  under  the 
terms  of  the  existing  law,  which  authorized  the  Secretary  of  the 
Treasury  to  fund  the  demand  notes,  coupled  with  the  authority, 
for  the  time  being,  to  defer  interest  payments." 

Two  official  communications  made  the  position  of  the  United 
States  Government  clear  and  unequivocal.  On  March  I,  1920, 
Secretary  Houston  wrote  to  Austen  Chamberlain,  Chancellor  of 
the  Exchequer,  that  the  proposition  for  a  general  cancellation  of 
the  inter-Allied  debts  would  "serve  no  useful  purpose.  I  feel  cer- 
tain," he  added,  "that  neither  the  American  people  nor  our  Con- 
gress, whose  action  on  such  a  question  would  be  required,  is  pre- 
pared to  look  with  favor  upon  such  a  proposal.     The  Allies'  debt 

*^  Washington  dispatch,  New  York  Times,  Feb.  23,  1919. 
"  Statement  of  T.  W.  Lament,  Associated  Press  dispatch,   St.  Augus- 
tine, Feb.  15,  1921. 


556        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

to  each  other  and  to  the  United  States  is  not  a  present  burden 
upon  the  debtor  governments  since  they  arc  not  paying  interest  or 
even,  as  far  as  I  am  aware,  providing  in  their  budgets  any  taxes  for 
the  payment  of  their  principal  or  interest." 

The  Secretary  also  pointed  out  the  evident  fact  that  the  can- 
cellation of  inter-Allied  indebtedness  was  not  the  sole  or  impor- 
tant cause  of  financial  distress  in  Europe.  He  pointed  out  that 
too  little  progress  had  been  made  in  the  direction  of  disarmament 
while  no  appreciable  progress  had  been  made  in  deflating  exces- 
sive issues  of  currency  or  in  stabilizing  the  currencies  at  new  levels. 
In  Continental  Europe  there  had  been  constant  increases  in  note 
issues  and  private  initiative  had  not  been  restored.  Unnecessary 
and  unwise  economic  barriers  still  existed. 

Seven  months  later,  in  October,  1920,  President  Wilson  wrote, 
in  reply  to  the  letter  of  Lloyd  George  of  August,  1920,  a  very 
decisive  note,  similar  in  tenor  to  that  of  Secretary  Houston.  It 
reads,  "You  will  recall  that  suggestions  looking  to  the  cancella- 
tion or  exchange  of  the  indebtedness  of  Great  Britain  to  the  United 
States  were  made  to  me,  when  I  was  in  Paris.  Like  suggestions 
were  again  made  by  the  Chancellor  of  the  Exchequer  in  the  early 
part  of  the  present  year.  The  United  States,  by  its  duly  authorized 
representatives,  has  promptly  and  clearly  stated  its  unwillingness 
to  accept  such  suggestions  each  time  they  have  been  made,  and  has 
pointed  out  in  detail  the  considerations  which  caused  its  decisions. 

"The  view  of  the  United  States  has  not  changed,  and  it  is  not 
prepared  to  consent  to  the  remission  of  any  part  of  the  debt  of 
Great  Britain  to  the  United  States.  Any  arrangements  the  British 
Government  may  make  with  regard  to  the  debt  owed  to  it  by 
France,  or  by  the  other  Allied  governments,  should  be  made  in 
the  light  of  the  position  now  and  heretofore  taken  by  the  United 
States,  and  the  United  States,  in  making  any  arrangements  with 
either  Allied  governments  regarding  their  indebtedness  to  the 
United  States  .  .  .  will  do  so  with  the  confident  expectation  of 
the  payment  in  due  course  of  the  debt  owed  the  United  States  by 
Great  Britain.  It  is  felt  that  the  funding  of  these  demand  obliga- 
tions of  the  British  Government  will  do  more  to  strengthen  the 
friendly  relations  between  America  and  Great  Britain  than  would 
any  other  course  of  dealing  with  the  same. 

"This  Government  has  endeavored  heretofore,  in  a  most 
friendly  spirit,  to  make  it  clear  that  it  cannot  consent  to  connect 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       557 

the  reparation  question  with  that  of  intergovernmental  indebted- 
ness. .  .  .  Unless  arrangements  are  completed  for  funding  such 
loans,  and  in  that  connection  for  the  deferring  of  interest,  in  the 
present  state  of  opinion  here  there  is  likely  to  develop  a  dangerous 
misunderstanding.  .  .  . 

"The  United  States  entirely  agrees  w^ith  the  British  Govern- 
ment that  the  fixing  of  Germany's  reparation  obligation  is  a  cardinal 
necessity  for  the  renevi^al  of  the  economic  life  of  Europe,  and  would 
prove  most  helpful  to  the  interests  of  peace  throughout  the  world. 
However,  it  (the  United  States)  fails  to  perceive  the  logic  in  the 
suggestion  in  effect  that  the  United  States  shall  pay  any  part  of 
Germany's  reparation  obligation,  or  that  it  shall  make  a  gratuity 
to  the  Allied  governments  to  induce  them  to  fix  such  obligations  at 
the  amount  within  Germany's  capacity  to  pay."*" 

ii.  The  Justification  and  Benefits  Considered 

(a)  Financial  Justifications — 

The  financial  justifications  are  that  our  debtors  cannot  pay, 
that  the  sum  is  too  great,  that  the  budgets  of  the  debtor  countries 
have  deficits,  that  their  exchange  rates  are  upset,  that  Europe  can 
pay  only  in  goods,  and  will  therefore  resort  to  dumping  in  the 
United  States,  and  that  the  United  States  sacrificed  relatively 
least  in  the  World  War.    Let  us  consider  these  points. 

I.  Inability  to  pay — Upon  the  entry  of  the  United  States 
into  the  war  the  shipments  of  gold  by  Great  Britain  and  France 
and  the  sales  of  foreign  holdings  of  American  and  neutral  securi- 
ties ceased.  During  the  war  and  until  the  release  of  the  "peg" 
in  March,  19 19,  the  Allied  powers  relied  primarily  on  advances 
by  the  United  States  government  and  did  not  utilize  the  measures 
employed  before  April,  191 7.  The  record  of  the  foreign  holdings 
of  the  securities  of  the  United  States  Steel  Corporation,  the 
American  Telephone  &  Telegraph  Co.,  and  the  New  York  Central 
Railroad  Co.,  show  a  cessation  of  selling  during  the  period  of 
our  belligerency. 

On  February  i,  19 17,  the  amount  of  New  York  Central  bonds 
held  abroad  was  25  per  cent  of  the  pre-war  amount  and  on  Febru- 
ary I,  1919,  it  was  27  per  cent.     By  July,  1920,  renewed  foreign 

*•  These  two  letters  were  inserted  by  Senator  Lodge  into  the  Congres- 
sional Record,  Senate,  July  18,   1921. 


558        INTERNATIONAX    FINANCE    AND    ITS    REORGANIZATION 

selling  had  reduced  the  amount  further.  The  percentage  of  New 
York  Central  Railroad  Co.  stocks  outstanding  abroad  at  the  end 
of  1 91 7  was  20  per  cent  of  that  at  the  end  of  19 14.  There  was 
practically  no  foreign  liquidation  during  our  participation  in  the 
war  and  it  was  only  after  the  release  of  the  "peg"  that  such 
liquidation  was  resumed.  At  the  end  of  1920,  the  amount  out- 
standing abroad  was  15.6  per  cent  of  the  pre-war  figure.  More 
striking  are  the  figures  of  the  United  States  Steel  Corporation. 
From  June  30,  1 91 4,  to  March  31,  1917,  the  sales  of  the  foreign 
holdings  of  United  States  Steel  Common  amounted  to  61  per  cent 
of  the  pre-war  amount.  From  the  month  of  our  entry  into  the 
war  (April,  191 7)  to  the  month  of  the  release  of  the  "peg" 
(March,  1919)  the  liquidation  was  o.i  per  cent,  a  negligible 
figure.  The  Allies  depended  upon  United  States  government 
advances  for  financing  their  purchases.  Upon  the  release  of  the 
"peg"  and  cessation  of  United  States  government  advances,  foreign 
liquidation  was  resumed  and  by  September  30,  1920,  about  13.4 
per  cent  more  of  the  pre-war  foreign  holdings  of  United  Steel 
Common  were  sold.  An  analysis  of  the  foreign  holdings  of  pre- 
ferred stock  of  the  United  States  Steel  Corporation  shows  like- 
wise hedvy  liquidation  by  Europe  until  our  entry  into  the  war, 
no  liquidation  during  the  period  of  United  States  government 
advances,  and  further  selling  when  these  advances  ceased.  Of 
American  Telephone  &  Telegraph  stock  held  abroad  at  the  begin- 
ning of  the  war  36  per  cent  was  sold  up  to  April  i,  191 7.  By 
March  14,  1919,  the  foreign  holdings  actually  increased  by  1.6 
per  cent  of  the  pre-war  figure;  but  by  September  20,  1920,  another 
15.2  per  cent  of  the  pre-war  holdings  were  sold.  Similar  conclu- 
sions result  from  an  analysis  of  the  liquidation  of  the  foreign 
holdings  of  New  York  Telephone  Co.  First  and  General  Mortgage 
4/2's. 

These  figures  show  clearly  that  Great  Britain  at  least  would 
have  continued  the  liquidation  of  her  mobilized  securities,  if  the 
United  States  had  not  advanced  government  funds.  The  Dollar 
Securities  Committee  in  Great  Britain  showed  that  about  lOOO 
million  dollars  of  American  securities  were  mobilized  for  sale  and 
2000  million  dollars  were  mobilized  for  deposit.  Sir  George  Paish 
and  other  responsible  economists  estimated  that  the  total  foreign 
investments  of  Great  Britain  before  the  war  amounted  to  20,000 
million  dollars,  and  that  of  this  amount  only  5000  million  dollars 


THE  INTER- ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       559 

had  been  sold.  None  of  the  Indian,  Colonial  or  South  American 
securities  had  been  mobilized.  Great  Britain  had  outstanding 
after  the  war  according  to  her  own  authorities,  approximately 
15,000  million  dollars  of  foreign  investments.  Apparently,  the 
argument  that  the  Allies  cannot  pay  does  not  hold.  In  fact,  the 
British  budget  for  1921-1922  provided  for  £42  million  to  cover 
interest  due  to  the  United  States.  And  if  inter-government  loans 
must  be  eliminated,  why  cancel  them?  Why  not  make  some 
provisions  for  substitution  of  private  for  public  securities? 

Neither  in  amount  nor  in  marketability  are  the  French  foreign 
investments  as  available  as  the  British.  The  fundamental  defect 
of  French  foreign  financial  policy  was  the  heavy  investment  in 
second  rate  "governments."  According  to  former  Minister  of 
Finance  Louis  Klotz,  the  pre-war  foreign  investments  of  France 
amounted  to  fr.  40,000  million,  about  $8000  million.  True,  about 
half  of  this  amount  was  invested  in  Russia  and  another  one-sixth 
in  Turkey  and  in  what  was  formerly  Austria-Hungary.  Still 
approximately  fr.  13,000  million,  about  $2600  million,  of  French 
foreign  investments  are  available  after  deducting  these  securities 
of  questionable  value.  The  scheme  for  the  mobilization  of  French 
securities  during  the  war  did  not  work.  Frenchmen  refused  to 
part  with  them.  M.  Descamps,  head  of  the  securities  department 
of  the  Bank  of  France,  addressing  the  October  (1920)  meeting 
of  the  Societe  Frangaise  d'Economie  Politique  stated  that  the  total 
sales  of  French  holdings  of  foreign  securities  did  not  exceed  fr. 
600  million,  and  that  the  largest  part  of  the  foreign  holdings  were 
still  intact.  The  total  amount  of  salable  French  holdings  of 
foreign  securities  may  not  be  equal  to  the  net  4000  million  dollars 
which  the  French  government  ov^es  to  the  governments  of  Great 
Britain  and  the  United  States,  but  her  foreign  securities  have  not 
been  completely  wiped  out.  They  are  still  available  for  part  pay- 
ment of  the  debt. 

Furthermore,  after  the  armistice,  the  nationals  of  both  Great 
Britain  and  France  made  large  foreign  investments, — in  Germany, 
Austria,  the  succession  States,  and  Turkey.  Although  the  amount 
is  not  known,  it  probably  exceeds  the  interest  due  to  the  United 
States  Government.  Finally,  the  ordinary  budget  of  France  for 
192 1  provided  for  fr.  4613  million  for  military  operations,  and  the 
extraordinary  budget  for  fr.  2814  million,  of  which  more  than 


56o 


INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


half  covered  military  expenses  in  Syria,  Cilicia,  and  Morocco. 
Whether  these  governments  are  able  to  pay  is  not  for  the  lender, 
the  United  States,  to  say.  International  ill-will  may  result.  The 
facts,  however,  speak  for  themselves. 

2.  Hugeness  of  the  sum — The  advocates  of  cancellation 
say  that  such  huge  figures  of  international  debts  are  without 
precedent  in  histor}\  They  say  that  the  sum  is  far  too  great.  A 
few  comparisons  may  be  adduced  to  test  the  validity  of  this  argu- 
ment. In  1 92 1,  the  premiers  of  Great  Britain  and  France 
decided  that  Germany  could  pay  an  indemnity  of  55  to  132 
billion  gold  marks,  in  spite  of  the  fact  that  she  was  shorn  of 
territory  containing  coal  mines,  potash  pits,  and  factories  devoted 
to  her  basic  industries,  was  deprived  of  her  merchant  fleet,  and 
was  subject  to  a  one-sided  interpretation  of  most-favored  nation 
rights  and  to  all  the  penalties  imposed  upon  her  by  the  treaty 
of  peace.  If,  under  these  conditions,  Germany  can  pay  55  to  132 
billion  gold  marks,  cannot  France,  after  the  increase  in  her  terri- 
tory, privileges  and  prestige  accruing  from  the  peace  treaty  pay 
the  United  States  a  debt  of  about  3000  million  dollars? 

There  is  another  angle  from  which  these  questions  may  be 
regarded.  The  total  foreign  debt,  fixed  and  floating,  privately 
and  publicly  held,  of  the  Allied  governments,  is  a  relatively  small 
fraction  of  the  total  debt.  It  is  true  that,  insofar  as  the  exchange 
rates  and  interest  payments  are  concerned  there  are  important 
differences  between  domestic  debts  and  foreign  debts;  nevertheless 
these  diiiferences  do  not  make  cancellation  inevitable.  A  large 
part  of  the  debts  of  the  governments  of  South  America  was  held 
abroad — 90  per  cent  in  the  case  of  Argentina.*^  This  fact  was  not 
a  reason  for  their  cancellation. 

Total  Public  and  Private  Foreign  Debt  of  Principal  Belligerents 
(conversion  at  parity) 


Country 


Per  cent  of 
total  debt 


Great  Britain 

France 

Italy 

Belgium 


16.3 

2S-9 
8.6 


"Williams,  John  H.,  Argentine  International  Trade  under  Inconvert- 
ible Paper  Money,  p.  ij. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?    561 

By  contrast,  Germany  will  have  a  foreign  debt  of  55  to  132 
billion  gold  marks,  equivalent  to  over  50  per  cent  of  her  total  debt, 
if  the  indemnity  figures  determined  in  London,  May  5,  192 1, 
remain  unchanged. 

3.  Budget  deficits — The  European  governments  indebted  to 
us  have  huge  deficits  in  their  budgets,  say  the  advocates  of  can- 
cellation. But  in  their  eyes  the  budget  deficits  seem  to  be  the 
mote  and  the  interest  due  to  the  United  States  seems  to  be  the 
beam.  With  the  exception  of  Great  Britain  the  countries  of 
Europe  had  deficits  which  in  1920  were  thirty  times  or  more  as 
great  as  the  interest  due  to  the  United  States  on  government 
advances.  The  interest  which  France  would  owe  on  United 
States  government  advances  is  only  1.6  per  cent  of  the  total  budget 
expenditures,  2.8  per  cent  of  the  total  budget  deficit,  and  6.7  per 
cent  of  the  total  service  of  the  debt.  The  interest  which  Italy 
would  owe  on  United  States  government  advances  is  1.7  per  cent 
of  the  total  budget  expenditures  for  1920,  3.0  per  cent  of  the  total 
budget  deficit,  and  7.9  per  cent  of  the  total  charges  for  service 
of  the  debt.     The  interest  which  Belgium  would  owe  is  i.o  per 


Interest   on   United   States   Government   Advances    Compared 
Items  in  1920  Budgets  ^^ 

(conversion  at  parity) 


WITH 


Country 


Great  Britain 

France 

Italy 

Belgium 


Annual 
interest 
due  on 
U.S. 
Govern- 
ment 
advances 

(in 
million 
dollars) 


(a) 

209.8 

147-3 

8:. 5 

17.0 


Budget 
Expenditures 


Amount 

(in 
million 
dollars) 


(b) 

5760 
9450 
4750 
1710 


Ratio 

of 
U.S. 

interest 


(a)  :  {b) 
Per  cent 

3-6 

1.6 

1.7 


Budget 
Deficit 


Debt 
Service 


Amoimt 

(in 
million 
dollars) 


ic) 


5230 

2740 

980 


Ratio 

of 

U.  S. 

interest 


(a)  :  (c) 
Per  cent 


.Amount 

(in 
million 
dollars) 


2.» 

30 
1-7 


id) 

1680 

2210 

1030 

205 


Ratio 

of 

U.  S. 

interest 


(a)  :  id) 
Per  cent 

12-5 

6.7 
7-9 
8.3 


"The  amounts  are  taken  from  Table  i,  Paper  IV,  of  the  International 
Financial  Conference,  at  Brussels,  1920. 


S62        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

cent  of  the  total  budget  expenditures  of  1920,  1.7  per  cent  of  the 
deficit,  and  8.3  per  cent  of  the  total  charges  for  the  service  of  the 
debt.  A  corresponding  comparison  for  the  minor  belligerents 
would  show  similar  results.  As  for  Great  Britain,  her  1920  budget 
has  no  deficit  and  the  argument  for  cancellation  on  this  score  falls. 
The  budget  for  1922,  submitted  April  25,  1921,  provided  £40 
million  to  pay  interest  on  United  States  government  advances.  A 
Treasury  circular  of  May  25,  1921,  called  for  economy  in  view 
of  the  need  to  pay  the  above  interest. 

The  mere  cancellation  of  the  inter-Allied  indebtedness  will 
not  make  the  budgets  balance.  Furthermore,  since  the  interest  on 
the  debt  to  the  United  States  has  been  deferred  for  three  years,  it 
does  not  figure  as  a  charge  in  the  budget  and  will  not  do  so  for 
another  year  at  least. 

4.  The  unsettlement  of  exchange  rates — The  advocates 
of  cancellation  maintain  that  the  interest  on  the  debt  due  the 
United  States  is  the  cause  of  the  unsettlement  of  the  exchange 
rates.  Few  arguments  could  be  more  unsound.  Before  the  war 
Great  Britain,  France,  Italy  and  Belgium  had  an  excess  of  imports. 
Compared  to  1913,  this  excess  in  1920  was  about  three  times  as 
great  in  Great  Britain,  eight  times  as  great  in  France,  over  nine 
times  at  great  in  Italy,  and  about  twice  as  great  in  Belgium.  An 
important  cause  of  the  unsettlement  of  the  exchange  rates  of  the 
European  powers  is  the  tremendous  increase  in  the  excess  of 
imports.  The  interest  due  the  United  States,  even  if  it  were  not 
deferred  for  three  years,  would  create  a  relatively  small  supply  of 
bills  on  these  European  governments.  The  ratio  of  the  interest 
payable  on  United  States  government  advances  to  the  excess  of 
merchandise  imports  is  only  1 1  per  cent  for  Great  Britain,  6  per 
cent  for  France,  4  per  cent  for  Italy,  and  3  per  cent  for  Belgium. 
A  corresponding  comparison  for  the  minor  countries  would  show 
similar  results. 

The  interest  on  the  United  States  debt  is  a  small  fraction  of 
the  total  excess  of  imports  of  the  debtor  countries  and  is  not  a 
significant  cause  in  the  derangement  of  exchange  rates.  And 
even  if  it  were,  the  interest  for  three  years  has  been  deferred  by 
the  Secretary  of  the  Treasury  and  therefore  present  exchange  rates 
are  practically  unaffected  by  the  Interest  payable  to  the  United 
States  in  the  future. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       563 


Interest  on  United  States  Government  Advances   Compared   with 
Excess  of  Imports 

(couversion  at  parity) 


Excess  of  Imports 

Interest 

on 

U.S. 

debt 

Ratio  of 

Country 

1913 
(million 
dollars) 

1920 
(million 
dollars) 

Ratio 

1920  to 

1913 

1920 
excess  of 
imports 

Great  Britain 

France 

Italy          

(a) 

650 
300 
219 
257 

(b) 

i860* 

246ot 

2095t 

491  § 

(b)  :  (a) 
Per  cent 

286 

820 

957 
191 

ic) 

209 

147 
8r 

17 

(c)  :  (b) 

Per  cent 

II 

6 

4 

Belgium 

3 

*  Based  on  ii   months'  official  figures 

t  Based  on  11   months'  official   figures,   11,682  million   francs. 

±  Based  on  6  months'  official   figures,   5043  million   lire. 

§  Based  on  10  months'  official  figures,  2122  million  francs. 

5.  Relatively  small  sacrifices  of  the  United  States — 
The  advocates  of  cancellation  point  to  the  relatively  small 
sacrifices  of  the  United  States  compared  with  those  of  the  other 
Allies.  The  vi^eakness  of  this  argument  for  cancellation  is  recog- 
nized even  by  Keynes.  "This  could  hardly  have  been  otherwise. 
It  was  a  European  quarrel,  in  which  the  United  States  government 
could  not  have  justified  itself  in  expending  the  whole  national 
strength  as  did  the  Europeans."  *^  The  question  of  sacrifice  may 
be  regarded  in  relation  to  the  period  of  belligerency,  the  gains 
from  the  war,  and  the  national  wealth  of  the  belligerents.  The 
relative  sacrifice  of  the  United  States  was  not  least  from  the  point 
of  view  of  the  period  of  the  belligerency.  In  nineteen  months 
the  United  States  incurred  a  national  debt  of  25,000  million 
dollars  as  compared  with  34,000  million  dollars,  the  war  debt 
incurred  by  Great  Britain  during  four  years  and  three  months  of 
war,  or  a  debt  of  24,000  million  dollars  incurred  by  France  during 
the  same  period.  During  the  six  months  of  fighting  after  the  Battle 
of  Chateau-Thierry,  the  actual  loss  in  men  by  the  United  States 
was  relatively  as  heavy  as  that  of  any  of  the  other  belligerents. 
The  relative  sacrifices  of  the  United  States  with  respect  to  gains 

*' Keynes,  J.  M.,  idem,  p.  273. 


564        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

from  the  war  certainly  was  not  least.  True,  Mr.  Wilson  said 
that  we  asked  for  nothing.  But  it  is  also  true  that  we  got  nothing. 
Is  the  United  States,  then,  to  pay  the  expenses  of  securing 
gains  to  its  co-belligerents?  In  his  argument  for  the  cancellation 
of  the  debt  of  France  to  the  United  States  Mr.  Noyes  says,  ^'Great 
Britain  has  already  obtained  advantages  from  the  war,  whose  value 
for  her  future  is  incalculable.  The  threat  to  Great  Britain's 
carrying  trade,  which  just  before  the  war  was  very  menacing,  has 
been  removed,  and  the  German  merchant  fleet  has  largely  been 
transferred  to  her.  The  specter  of  a  growing  German  navy  has 
vanished.  The  British  colonial  empire  has  been  immensely 
strengthened  at  the  expense  of  Germany  and  the  removal  of  Ger- 
man intrigue  from  the  politics  of  the  Near  East  has  relieved  a 
former  anxiety  for  the  safety  of  India."  ^° 

But  the  gains  of  France  have  been  equally  vital.  A  powerful 
and  threatening  imperial  neighbor  has  been  made  impotent  and 
dernocratic  by  the  joint  effort  of  all  the  Allies.  In  announcing  the 
extensive  gains  of  France  as  a  result  of  the  war.  Finance  Minister 
Klotz,  in  the  debate,  in  the  Chamber  of  Deputies,  September  15, 
1919,  on  the  ratification  of  the  treaty  of  peace,  stated  that  the 
terms  of  the  treaty  assured  a  bright  future  to  France.  The  rail- 
way materials,  agricultural  implements,  and  other  property  stolen 
by  Germany  was  to  be  returned.  France  obtained  part  of  the 
German  shipping  tonnage  and  large  stocks  of  dyes,  7  million  tons  of 
coal  per  year  for  10  years,  the  return  to  France  of  Alsace-Lorraine 
free  of  all  debts,  a  portion  of  the  German  interest  in  Russia,  the 
right  to  sequester  all  German  property  in  Morocco,  and  a  French 
mandate  over  part  of  the  German  colonies.  In  addition  France 
obtained  the  right  to  claim  not  only  full  reparation  for  damage 
to  property  during  the  war  but  also  to  the  payment  of  the  cost  of 
all  pensions  and  allowances  resulting  from  it. 

The  other  powers,  Italy,  Belgium,  Rumania,  and  Servia,  like- 
wise obtained  material  benefits  because  of  the  participation  of  the 
United  States.  From  the  standpoint  of  relative  gains,  the  United 
States  did  not  sacrifice  least  of  the  Allies. 

Only  from  the  point  of  view  of  wealth  did  the  United  States 
make  a  small  sacrifice,  though  by  no  means  the  least.  Although 
the  figures  for  national  wealth  are  not  accurately  determinable, 

^"  Noyes,  P.  B.,  While  Europe  Waits  for  Peace.  New  York:  Mac- 
millan  &  Co.,  1920. 


THE  mXER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       565 

they  are  approximately  correct.  Using  the  accepted  figures  of 
Dr.  J.  C.  Stamp, ^^  the  post-war  debt,  expressed  in  terms  of  national 
wealth,  is  10.97  P^^  ^^"t  ^o''  Japan,  12.59  P^^*  cent  for  Belgium, 
and  13.01  per  cent  for  the  United  States.  Similarly,  the  post- 
war per  capita  debt  of  the  United  States  is  not  the  least  of  the 
Allied  powers.  The  per  capita  debt  of  Japan  is  $22.14,  of  Greece 
$105.25,  of  Canada  $189.45,  of  Belgium  $246.67,  and  of  the 
United  States  $249.38.^-  If  the  mere  fact  that  the  United  States 
is  wealthy  is  to  be  a  justification  for  canceling  the  debt,  by  the  same 
token  any  poor  nation  might  call  upon  one  of  the  richer  to  help 
share  its  burdens  in  times  of  peace.  To  do  so  may  be  ethically 
correct,  but  there  are  no  sound  principles  whereby  the  procedure 
of  the  redistribution  of  the  national  wealth  of  the  countries  of  the 
world  may  be  effected. 

The  advocates  of  cancellation  indulge  in  many  hypotheses. 
Mr.  Noyes,  the  advocate  of  cancellation  of  the  French  debt,  and 
the  editors  of  the  New  Republic,  °^  advocates  of  general  cancella- 
tion, advance  the  postulate  that  if  we  had  entered  the  war  earlier 
we  would  have  spent  more  on  our  ov/n  account,  instead  of  having 
the  Allies  spend  it  for  us.  However,  these  "ifs"  and  "ands"  lead 
nowhere.  Such  assumptions  are  fruitless.  If  the  United  States 
had  been  content  to  fight  a  defensive  war,  as  Japan  did,  or  if  the 
United  States  had  not  given  its  blood  and  treasure  without  stint 
or  limit,  the  result  for  the  European  Allies  might  have  been  dif- 
ferent. France  might  have  been  ruined  and  England  seriously 
reduced  in  prestige.  During  its  progress  the  war  was  conceived 
as  a  holy  cause,  but  most  of  the  foreign  diplomats  have  degraded  it 
into  a  scramble  for  territory  and  privilege.  Inspiring  ideals  became 
merely  a  ruse  de  guerre.  Furthermore,  the  war  was  not  an  Ameri- 
can quarrel  primarily.  It  grew  out  of  age-long  and  festering 
animosities  on  the  continent  maintained  by  social  traditions.  The 
fact  that  the  United  States  was  regarded  as  an  associate  rather 
than  as  an  ally  is  a  recognition  of  its  remoter  interest.  As  Mr. 
Harding  stated  baldly,  "The  United  States  entered  the  war  to 
defend  its  ships."  And  now  it  is  being  asked  to  pay  part  of  the 
indemnity.    The  assumptions  and  hypotheses  put  forth  by  the  advo- 

"  Wealth  and  Income  of  the  Chief  Powers,  British  Statistical  Journal, 
July,  1919.^ 

'**  Including  debt,  covering  loans  to  Allies,  which  were  about  33  per 
cent  of  the  total  debt. 

"  Dec.  22,  1920,  p.  98. 


566        INTERNATIONAL    FINANCE    AND    ITS    REORGAIOZATION 

cates  of  cancellation  are  not  convincing  arguments  for  the  release 
of  the  foreign  governments  from  their  formal  obligations,  although 
they  have  value  in  supporting  an  attitude  of  reasonableness  and 
moderation.  Secretary  Houston  after  stating  them  concluded,  "In 
the  circumstances  w^e  must  deal  with  the  debts  of  the  Allied  govern- 
ments in  a  spirit  of  fairness."^* 

6.  Dumping  of  European  goods — Another  argument  for  the 
cancellation  of  the  debt  is  that  the  Allies  cannot  pay  in  gold, 
because  9600  million  dollars  of  gold  are  not  available.  If  they 
pay  in  securities,  the  interest  on  the  securities  can  be  met  only  by 
the  shipment  of  goods.  The  settlement  of  international  indebted- 
ness can  be  effected  only  by  the  flow  of  commodities.  Therefore, 
say  the  advocates  of  cancellation,  American  trade  will  be  ruined 
if  Europe  pays  her  debts  by  dumping  her  goods.  On  this  theory 
international  trade  is  profitable  only  if  a  country  has  an  excess 
of  exports,  even  if  these  exports  are  shipped  as  a  gift.  According 
to  this  view  our  billions  of  excess  of  exports  during  the  war  con- 
stitutes the  greatest  "handout"  in  history.  Under  such  a  theory 
the  irony  of  the  phrase  "a  favorable  balance  of  trade"  exposes  the 
fallacy  of  lingering  mercantilist  conceptions.  Before  the  war 
England,  France,  Germany  and  most  of  the  countries  of  Europe 
had  an  excess  of  imports  of  merchandise,  which  was  offset  by 
invisible  credits.  If  the  Allies  pay  us  in  goods  we  also  may  ulti- 
mately have  an  excess  of  imports  of  merchandise,  but  the  economic 
conditions  of  the  country  will  have  become  adjusted  to  it.  The 
overturn  of  the  balance  of  trade  is  a  normal  phenomenon  of  an 
industrially  maturing  country. 

(b)   Political  Justifications — 

In  addition  to  the  financial  justifications  for  the  canceling  of 
the  inter-Allied  debts,  political  considerations  are  adduced  in  sup- 
port of  the  policJ^  The  inter-Allied  loans,  it  is  said,  will  endanger 
peace  and  the  victors  will  be  paying  an  indemnity  to  each  other. 
Furthermore,  America's  advances  to  the  Allies  constituted  the  cost 
of  destroying  militarism.     Let  us  assess  the  argument. 

I.  Payment  of  indemnity  by  victors — In  advocating  the 
cancellation  of  the  Inter- Allied  debts,  It  Is  said  that  "the  w?r  will 
"Annual  report  of  the  Secretary  of  the  Treasury,  1920,  p.  64. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?   567 

have  ended  with  a  network  of  heavy  tribute  payable  from  one  Ally 
to  another,  an  amount  even  likely  to  exceed  that  obtainable  from 
the  enemy.  The  war  will  have  ended  with  the  intolerable  result 
of  the  Allies  paying  indemnities  to  one  another,  instead  of  receiv- 
ing them  from  the  enemy."  ^^  The  fact  of  the  matter  is  that  if 
the  inter-Allied  debts  are  canceled  America  will  be  paying  the 
indemnity  to  the  European  Allies.  Great  Britain  will  lose  nothing. 
Her  borrowings  from  the  United  States  approximately  equal  her 
good  debts  for  she  has  already  written  off  50  per  cent  of  her 
advances,  because  they  were  made  to  the  impoverished  countries  of 
the  Continent.  But  about  50  per  cent  of  the  United  States 
advances  w^re  made  to  Great  Britain.  Cancellation  of  the  inter- 
Allied  debts  will  impose  the  heaviest  penalty  upon  the  United 
States.  If  America  is  to  be  penalized  for  having  helped  to  win 
the  war,  by  the  same  token  Germany  ought  to  be  rewarded  for 
having  made  the  attack. 

2.  The  cost  of  crushing  militarism — It  is  said  that  the 
burden  involved  in  the  cancellation  of  the  inter-Allied  debts  is  the 
contribution  of  the  richer  countries  toward  the  destruction  of 
militarism.  The  aftermath  of  the  war  has  disillusioned  even  the 
peacemakers  as  to  the  destruction  of  militarism.  President  Wilson, 
in  a  letter  to  Senator  Hitchcock  on  May  8,  1920,  said:  "Mili- 
taristic ambitions  and  imperialistic  policies  are  by  no  means  dead, 
even  in  councils  of  the  nations  whom  we  most  trust,  and  with 
whom  we  most  desire  to  be  associated  in  the  tasks  of  peace.  .  .  . 
For  my  own  part  I  am  as  intolerant  of  imperialistic  designs  on  the 
part  of  other  nations  as  I  was  of  such  designs  on  the  part  of 
Germany."  The  subsequent  chauvinist  continental  policies  cor- 
roborate the  President's  statement  more  fully  than  did  the  cases 
he  cited.  Militarism  is  not  dead.  It  merely  changed  its  garb  and 
transferred  the  sphere  of  its  operations.  The  belief  of  the  Sand- 
wich Islander  that  the  spirit  of  the  slain  enters  the  victor's  body 
and  strengthens  him  finds  ghastly  confirmation  in  the  post-war 
diplomacy  on  the  continent  of  Europe. 

3.  Imperiling  of  peace — In  favor  of  cancellation  the  argu- 
ment is  advanced  that  the  existence  of  war  debts  leads  to  hatred 
of  the  creditor  country  and  is  an  incentive  to  break  relations  with 

"  Keynes,  idem,  p.  277. 


568        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

it.  Apparently  a  new  standard  of  ethics  is  to  be  set  up.  Good  will 
is  to  be  purchased  and  friendship  is  to  be  had  for  a  consideration. 
On  this  theory  an  expression  of  animosity  by  the  debtor  is  to  be 
equivalent  in  the  future  to  the  creditor's  acknowledgment  of  pay- 
ment in  full. 

Loans,  received  with  gratitude  by  debtors  in  distress,  have  for 
centuries  been  the  source  of  ill  will  when  they  matured.  Jeremiah 
expresses  this  thought  when  he  says,  "I  have  neither  lent  nor  have 
I  borrowed,  yet  everyone  curses  me."  The  9500  million  dollars 
spent  during  the  war  must  be  paid  by  someone.  Bonds  for  this 
amount  are  held  by  American  citizens.  If  the  Allies  do  not  pay, 
the  American  taxpayer  will.  Whoever  liquidates  the  debt  will 
entertain  a  sense  of  injury,  whether  it  be  the  citizen  of  the  foreign 
government  or  the  American  taxpayer.  If  the  debtor  pays  he 
hates  the  creditor,  and  if  the  debtor  does  not  pay  the  creditor  hates 
him.  Faith  between  borrower  and  lender  has  been  maintained 
because  the  welcher's  fear  of  social  stigma  is  stronger  than  his 
animosity  toward  the  lender. 

On  the  other  hand,  say  the  advocates  of  cancellation  "if  these 
accrued  debts  are  forgiven  a  stimulus  will  be  given  to  the  solidarity 
and  true  friendliness  of  the  nations  lately  associated."  ^®  These 
international  benefits  of  cancellation  are  undoubtedly  exaggerated. 
The  common  war  apparently  did  not  check  antagonism  between 
Italy  and  Jugoslavia  when  their  interests  conflicted.  Great  Britain 
and  France  expressed  such  divergent  views  on  the  question  of  a 
moderate  indemnity  that  Lloyd  George  had  to  threaten  the  Paris 
press  because  of  its  hostility  toward  the  British.  It  is  infantile  to 
assume  that  acts  of  generosity  between  the  nations  result  "in  true 
friendliness."  The  Allied  press  was  profuse  in  its  laudations  of 
American  generosity  at  the  time  that  the  inter-Allied  advances 
were  made,  but  were  malicious  in  their  criticism  of  American 
moderation  at  the  peace-table.  Cancellation  of  the  debt  by  the 
United  States  may  lead  to  a  temporary  outburst  of  gratitude.  It 
will  not  promote  perm.anent  international  solidarity. 

The  inter-Allied  debts  do  not  endanger  peace.  Before  the  war 
Great  Britain  had  20,000  million  dollars  invested  abroad,  of  which 
3500  million  dollars  was  invested  in  the  United  States.  France 
had  8000  million  dollars  invested  abroad  of  which  4000  million 
dollars  was  invested  in  Russia.    The  amount  of  the  United  States 

•"Keynes,  idem,  p.  279. 


THE  INTER- ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       569 

government  advances  are  not  much  larger  than  the  French  pre- 
v\7ar  foreign  investments  and  less  than  half  as  great  as  the  British. 
Although  technically  there  is  a  distinction  between  private  and 
public  ownership  of  bonds  of  a  foreign  power,  yet  in  effect  there 
is  none.  If  the  Allies  default,  or  if  the  debt  is  canceled,  the 
American  taxpayer  will  have  to  bear  the  burden. 

The  advocates  of  cancellation  of  the  inter-Allied  debts  are 
without  historic  justification  or  precedent  in  their  prophecies  of 
international  friction  and  ill-will.  Over  90  per  cent  of  the  Argen- 
tine debt  was  held  by  foreigners.  France  specialized  in  government 
securities  before  the  war.  They  were  not  regarded  as  dangerous 
when  France  was  the  creditor.  Why  should  they  be  any  more 
dangerous  when  France  is  a  debtor?  It  is  said  that  before  the 
war  international  debts  were  incurred  for  productive  needs,  and 
in  this  respect  they  differ  from  the  inter-Allied  debts.  But  some 
of  the  government  loans  made  before  the  war  were  not  advanced 
for  productive  purposes.  Furthermore,  to  the  extent  that  the  vic- 
torious Allies  gained  materially,  the  war  debts  to  the  United  States 
may  be  regarded  as  productive  loans. 

International  loans  endanger  peace  less  than  the  imperialistic 
ambitions  of  those  nations  of  Europe  which  have  obtained  independ- 
ence or  added  power  as  a  result  of  the  war.  There  is  little  fear 
of  war  between  the  United  States  and  the  debtor  Allies  if  the  loans 
are  not  canceled.  There  is,  however,  genuine  fear  of  a  new  war 
if  these  loans  are  canceled.  Militaristic  Germany  was  the  aggres- 
sor in  the  World  War  among  other  reasons  because  of  her  low 
per  capita  debt  before  the  w^ar.  Her  successors  in  imperialist 
policies  in  Europe  will  be  subject  to  a  similar  temptation.  A  heavy 
foreign  indebtedness  to  a  peace-loving  power  like  the  United 
States  is  to  a  degree  a  guarantee  of  the  peace  of  Europe.  The 
world  is  temporarily  insured  against  war  by  reason  of  the  fact 
that  the  unsatisfied  nations  of  Europe  will  have  to  pay  off  the  debts 
of  one  war  before  they  can  obtain  credit  to  enter  upon  another. 

In  fact  Senator  Borah  would  have  the  United  States  utilize  the 
debts  of  the  foreign  governments  as  a  means  of  reducing  arma- 
ments and  military  operations.  In  his  opinion,  nations  expending 
large  sums  for  these  purposes  should  be  compelled  to  pay  promptly 
the  interest  due.so^^ 

•••Cong.  Record,  Senate,  July  25,  1921. 


570        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

iii.  Arguments  Against  Cancellation 

The  objections  to  cancellation  are  that  the  United  States  will 
be  the  chief  loser,  that  the  shaking  of  international  faith  may  lead 
to  repudiation  elsewhere,  that  new  credit  plans  for  the  revival  of 
Europe  may  be  ruined,  and  that  domestic  creditors  of  Europe  will 
be  favored  as  against  foreign  creditors. 

(a)  Heaviest  Loss  to  the  United  States — 

The  United  States  made  cash  advances  of  9466  million  dollars, 
of  which  Great  Britain  received  4197  million,  France  2966  million, 
and  Italy  1631  million.  Russia  received  only  2  per  cent  of  the  total, 
and  the  remainder  went  to  the  lesser  Allies.  None  of  the  debtors 
of  Great  Britain  has  the  strength  or  credit  standing  of  the  chief 
debtor  of  the  United  States.  In  other  words,  the  loans  by  Great 
Britain  and  France  are  not  as  collectible  as  the  loans  of  the 
United  States.  Even  though  the  nominal  amount  advanced  by 
Great  Britain,  9251  million  dollars,  approximates  the  amoimt 
advanced  by  the  United  States,  the  collectible  portion  is  far  less. 
Great  Britain,  for  instance,  advanced  about  31  per  cent  of  her 
total  to  Russia,  and  France  almost  50  per  cent. 

Of  the  total  debt  of  the  United  States,  amounting  to  about 
26,000  million  dollars,  roughly  10,000  million  dollars  constituted 
advances  to  the  Allies.  In  other  words,  about  40  per  cent  of  the 
interest  paid  by  the  United  States  on  bonds  outstanding  is  on 
account  of  the  indebtedness  of  the  Allies.  However,  this  does  not 
imply  that  40  per  cent  of  the  expenses  of  the  post-war  budget 
result  from  the  failure  of  the  Allies  to  pay  the  interest  on  their 
indebtedness.  In  fact  the  net  burden  to  the  United  States  is  only 
about  450  million  dollars  per  annum.  The  annual  interest  owed 
by  the  Allies  constitutes  about  lO  per  cent  of  the  post-war  budget 
of  the  United  States.  However,  because  of  the  graduation  of  the 
income  tax,  the  rich  will  pay  more  than  10  per  cent  additional,  if 
the  Allies  default  permanently  on  the  interest. 

(b)  Crippling  of  International  Credit — 

Cancellation  by  the  United  States  will  probably  result  only 
from  a  pressure  by  the  debtors,  equivalent  to  repudiation.  The 
whole  delicate  structure  of  international  credit  is  based  on  con- 
fidence  among   nations.     Great   Britain   still   has  almost    15,000 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?   57 1 

million  dollars  invested  abroad  and  France  almost  8000  million 
dollars,  although  much  of  the  latter  is  in  securities  of  doubtful 
value.  Cancellation  under  pressure  will  shake  the  structure  of 
international  credit,  particularly  the  credit  of  those  debtors  who 
fail  to  pay  the  inter-Allied  debts.  Furthermore,  France's  net 
indebtedness  on  government  loans  is  3958  million  dollars  and  the 
Russian  indebtedness  alone  to  France  on  pre-war  account  exceeds 
this  amount.  If,  as  the  result  of  pressure  the  French  debt  to  the 
United  States  amounting  to  2966  million  dollars  is  canceled,  how 
can  France  expect  revolutionary  Russia  to  pay  the  debts  incurred 
by  the  Czarist  regime? 

The  post-war  period  should  be  a  period  of  increased  inter- 
national faith,  and  strengthened  confidence  in  international  credit. 
To  secure  these  all  nations  should  scrupulously  observe  their  obliga- 
tions. The  cancellation  under  pressure  of  the  inter-Allied  debts 
will  not  further  these  ends.  Enforced  cancellation  will  ruin  new 
credit  plans.  One  cannot  eat  one's  cake  and  have  it;  one  cannot 
break  one's  faith  and  keep  the  confidence  of  others.  Cancellation, 
if  it  were  whole  heartedly  entered  into  by  the  United  States, 
might  improve  credit  conditions,  just  as  a  bankrupt's  credit  is 
temporarily  improved  after  a  settlement  with  creditors.  However, 
the  stigma  of  having  failed  to  observe  his  obligations  weakens  for 
a  long  time  the  credit  of  a  bankrupt.  Similarly  the  proposed 
cancellation  would  weaken  international  credit  in  a  crucial  period. 

(c)   Priority  of  Lien  of  Foreign  Creditors — 

The  international  financial  situation  bears  a  close  resemblance 
to  a  private  bankruptcy.  The  Allies  cannot  pay  the  interest  on 
their  debts  and  the  United  States  government,  the  creditor,  has 
agreed  to  defer  it.  The  Allies  are  technically  insolvent;  they  are 
unable  to  meet  current  indebtedness  out  of  current  revenue.  Under 
these  conditions  the  rules  of  bankruptcy  should  apply.  In  private 
bankruptcy,  the  rule  is  that  claims  of  stockholders  are  last  in  order 
of  priority  on  the  list  of  liens  against  assets.  By  analogy,  in  public 
finance  internal  loans  should  be  junior  to  external  loans.  In 
other  respects  the  rules  of  private  bankruptcy  are  being  applied  in 
Europe  to-day.  New  loans  are  being  made,  secured  by  liens  against 
specific  sources  of  revenue.  They  are  the  equivalent  of  receiver's 
certificates  in  private  finance.  The  methods  of  financing  a  bank- 
rupt  and  of  strengthening  his   credit   after  a  composition   or   a 


572        INTERNATIONAL    FINANCE   AND    ITS    REORGANIZATION 

reorganization  are  applicable  in  the  present  condition  of  the  govern- 
ments of  Europe.  If  external  creditors  are  regarded  as  junior 
to  internal  creditors,  then  the  United  States  will  have  under- 
w^'ritten  the  financial  incompetence  of  France  and  Italy,  because 
of  their  failure  to  follow  the  British  precedent  of  heavy  taxation 
during  the  war. 

E.  Alternative  Proposals 

Undoubtedly  the  balancing  of  the  pros  and  cons  would  indicate 
that  the  Allies  ought  to  pay  their  obligations  faithfully.  However, 
payment  in  cash  is  impossible  during  the  disturbed  conditions  of 
exchange  and  the  only  course  practicable  under  those  conditions  is 
the  one  recommended  by  the  Secretary  of  the  Treasury:  interest 
should  be  deferred  until  the  situation  settles  and  the  ultimate 
course  becomes  clarified. 

;*.  The  Intent 
(a)  Loans  not  Subsidies — 

The  advances  to  the  Allies  were  regarded  as  legal  loans,  not 
as  subsidies.  There  is  no  way  whereby  the  Allies  may  be  released 
from  their  obligations  other  than  through  an  act  of  Congress. 
The  debtor  governments  have  deposited  obligations  with  the  Secre- 
tary of  the  Treasury  which  read  in  part  as  follows :  ^^ 

Certification   of   Indebtedness 


The  Government  of   for  value  received, 

promises    to    pay    to    the    United    States    Government,    the    sum    of 

dollars  on  demand,  iviih  interest  from 

date  hereof   per  cent  per  annum.     Such  principal  and 

interest  thereon  liill  be  paid,  luiihout  deduction  for  any  (foreign) 
taxes,  present  or  future,  in  gold  coin  of  the  United  States  of  America 
of  the  present  standard  of  isjeight  and  fineness,  at  the  Treasury  of  the 
United   States    in    Washington.      This   certificate   luill    be    con-verted 

by  the  Government  of if  requested  by  the  Secretary 

of  the    Treasury   of   the    United  States   of  America   at  par  with  an 

adjustment  of  accrued  interest,  into  an  equal  par  amount  of 

per  cent  Convertible  Gold  Bonds  of  the  Government  of 


(Signature  of   representative 
of  foreign  government) 


"  Annual  Report  of  the  Secretary  of  the  Treasury,  1920,  p.  56. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       573 

To  find  flaws  in  the  technical  form  of  the  loans  would  make 
of  them  the  most  artful  dodge  in  the  annals  of  nations. 

(b)  Military  Exigency  vs.  Financial  Prudence — 

At  the  time  the  cash  was  advanced  by  the  United  States,  the 
considerations  were  not  financial  prudence  but  rather  military 
exigency.  The  advances  were  made  during  a  period  of  exaltation 
and  collection  is  attempted  during  a  period  of  sober  second  thought. 
The  crux  of  the  difficulty  is  not  in  the  Allied  request  for  cancella- 
tion of  loans  which  they  find  it  extremely  difficult  to  pay  but  in 
the  readiness  with  which  a  generous  creditor  advanced  much  more 
than  the  debtor's  condition  warranted.  In  other  words,  these 
loans  must  be  regarded  not  as  business  loans,  made  Vv^ith  all  due 
regard  to  commercial  considerations,  but  as  war  loans  based 
primarily  on  the  vital  interests  directly  of  the  Allied  debtors  and 
indirectly  of  the  United  States  government. 

if.  Impossibility  of  Cash  Payment 

The  insistence  on  present  cash  payment  by  the  Allies  would 
lead  to  grave  financial  disturbances.  It  is  true  that  Great  Britain 
has  planned  the  retirement  of  credit  advances  of  150  million  dollars 
made  during  the  war  by  a  group  of  Canadian  banks  to  finance 
purchases  of  war  materials  in  the  Dominion.^^  However,  the 
amount  involved  is  insignificant,  about  3  per  cent  of  the  British 
debt  to  the  United  States  government. 

(a)   Effect  on  Exchange  Rates — 

Interest  on  external  loans  cannot  be  paid  even  if  interest  on 
internal  loans  is  paid.  Payment  of  interest  on  internal  loans  is 
simply  a  bookkeeping  transaction.  Cash  is  taken  from  one  group 
in  the  community  as  taxes  and  paid  to  another  group  in  the  com- 
munity as  interest  on  bonds.  An  external  loan,  however,  involves 
a  transfer  of  funds  out  of  the  country  and  this  can  be  accomplished 
at  present  not  by  means  of  currency  but  by  means  of  bills  of 
exchange.  This  distinction  is  not  clear  even  to  diplomats.  French 
officials  called  attention  to  the  fact  that  the  German  budget  pro- 
vided 12,000  million  marks  for  interest  on  internal  bonds.^*^    They 

"'New  York  Tribune,  Dec.  31,  1920. 
"'Associated  Press  dispatch,  Paris,  Dec.  20,  1920. 


574        INTERNATIONAL    FINANCE   AND    ITS    HEORGANIZATION 

say  that  these  funds  should  be  paid  to  the  Allies  rather  than  to  the 
German  bondholders  because  the  treaty  of  peace  provides  ^°  that 
"sums  for  reparation  that  Germany  is  required  to  pay  shall  become 
a  charge  upon  all  their  revenues  prior  to  that  for  service  or  dis- 
charge of  any  domestic  loan." 

In  view  of  the  depreciated  foreign  exchanges  of  the  debtor 
governments  it  would  not  be  to  the  advantage  of  the  United 
States  to  demand  cash  payment  of  interest.*^^  The  depreciation  of 
the  foreign  exchanges  makes  it  impracticable  for  the  debtor  govern- 
ments to  pay  in  dollars.  "The  United  States  Treasury  has  no 
need  for  any  considerable  amount  of  these  currencies  and  could 
not  afford  to  accumulate  large  idle  foreign  balances.  If  the 
Treasury  does  not  defer  the  collection  of  interest  and  thus  adds 
to  the  present  difficulties  by  demanding  an  immediate  cash  payment 
of  interest  before  the  trade  of  Europe  has  an  opportunity  to  revive, 
we  should  not  only  make  it  impossible  for  Europe  to  continue 
needed  purchases  here  and  decrease  their  ultimate  capacity  to  pay 
their  debt  to  us,  but  should  hinder  rather  than  help  the  recon- 
struction which  the  world  should  hasten.  A  nation  may  liquidate 
its  foreign  debts  only  by  the  accumulation  of  foreign  credits,  which 
may  be  accomplished  through  an  excess  of  commodity  exports, 
invisible  exchange  items,  the  creation  of  credits  by  loans  or  by  the 
export  of  gold." 

The  interest  if  paid  would  create  an  additional  supply  of  450 
million  dollars  per  annum  of  bills  of  exchange,  for  which  there 
is  no  demand  in  the  United  States.  The  Allies  cannot  during  this 
period  liquidate  even  their  current  indebtedness  on  imports  but 
must  have  additional  credit  in  order  to  be  able  ultimately  to  adjust 
their  international  balance. 

(b)   Payment  in  Foreign  Securities — 

Instead  of  having  the  debt  canceled  the  European  governments 
would  be  able  to  settle  by  transferring  to  the  United  States  their 
holdings  of  foreign  securities.  True,  the  transfer  of  these  securities 
from  private  owners  to  the  government  would  involve  a  difficult 
financial  operation  in  both  Great  Britain  and  France.  However, 
the   mobilization   of  securities  in   Great   Britain  during  the  war 

°°  Annex  2,  Art.  xii,  paragraph  b. 

"Annual  report  of  the  Secretary  of  the  Treasury  for  1919,  pp.  66-67 
and  for  1920,  p.  59.  Also  letter  Dec.  18,  1919,  of  Secretary  Glass  to 
Representative  Fordney. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       $75 

affords  ample  demonstration  of  the  feasibility  of  the  operation, 
The  debt  of  the  British  government  to  the  United  States  amounts 
to  4197  million  dollars.  The  foreign  investments  of  British  capi- 
talists amount  to  about  15,000  million  dollars,  according  to  the 
estimates  of  Sir  George  Paish  and  other  competent  authorities. 
The  debt  of  the  French  government  to  the  United  States  amounts 
to  2966  million  dollars.  The  holdings  of  foreign  securities  by 
Frenchmen  amount  to  about  8000  million  dollars,  in  which  are 
included  obligations  of  the  old  Russian  empire  amounting  to  about 
4000  million  dollars.  Since  the  inter-Allied  loans  are  not  due 
until  1938  and  1947,  there  will  be  considerable  time  to  effect  the 
transfer,  in  instalments,  from  private  investors  to  the  government. 
Even  if  the  foreign  governments  do  not  substitute  the  security 
holdings  of  their  nationals  for  the  government  debt  to  the  United 
States,  there  is  a  possibility  of  liquidating  this  debt  by  means  of 
short-term  bills.  The  experience  of  Argentina  before  the  war 
and  of  other  countries  which  borrowed  heavily  abroad  indicates 
that  the  depreciation  of  exchange  due  to  the  payment  of  interest 
abroad  stimulates  exports  and  tends  to  raise  the  exchange  rate. 
It  is  within  the  range  of  possibility  that  before  the  due  date  of 
the  debts  the  depreciation  of  sterling  exchange  may  stimulate 
exports  to  the  extent  that  these  exchange  rates  would  rise  to  the 
gold  import  point.  In  this  event,  instead  of  exporting  gold  the 
United  States  should  be  able  to  return  an  equivalent  amount  of 
the  obligations  of  the  British  government.  Before  the  war  the 
international  movement  of  securities  was  an  effective  means  of 
avoiding  gold  shipments.  The  Secretary  of  the  Treasury  recom- 
mended also  that  the  agreement  with  the  foreign  governments 
should  give  the  United  States  government  the  right  to  use  the 
obligations  of  those  governments  in  settlement  of  war  claims  here- 
after made  against  the  United  States,  and  should  provide  for 
accelerating  the  payment  of  all  deferred  interest  whenever  the 
exchange  rates  of  the  foreign  government  reached  the  gold  import 
point."-  The  same  condition  would  hold  for  the  continental 
debtors,  if  they  adopt  new  gold  parities. 

(c)  Payment  in  American  Territorial  Possessions — 

The  suggestion  that  Great  Britain  transfer  part  of  her  Ameri- 
can colonial  possessions  to  the  United  States  in  liquidation  of  her 

"Annual  Report  of  the  Secretary  of  the  Treasury,  1920,  p.  62. 


576        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

indebtedness  was  made  in  the  late  summer  of  191 9  by  Lord 
Rothermere  and  by  the  London  National  News.^^  As  a  private 
citizen,  ex-Secretary  McAdoo  suggested  a  similar  course,''*  Senator 
Willis,  of  Ohio,  introduced  a  bill  into  the  Senate  with  the  same 
object  in  view.^^  The  territory  affected  would  include  Bermuda, 
the  Bahamas,  Barbados,  Jamaica,  Trinidad,  the  Windward  Islands, 
the  Leeward  Islands,  British  Honduras,  and  British  Guiana. 

The  proposal  that  France  pay  for  part  of  her  debt  to  the  United 
States  by  transferring  her  American  colonial  possessions  was  advo- 
cated by  Professor  Charles  Gide,  on  the  ground  that  it  would 
save  the  cost  of  developing  these  hardly  profitable  territories,  and 
that  perhaps  the  military  expense  of  maintaining  far-flung  posses- 
sions is  a  luxury  that  France  cannot  aflFord.  He  recommends  that 
French  colonial  aspirations  should  be  confined  to  Africa.^®  The 
possessions  involved  are  French  Guiana,  with  an  area  of  32,000 
square  miles  and  a  population  of  49,000,  and  the  islands  Mar- 
tinique, Guadalupe,  St.  Pierre  and  Miquelon,  with  a  total  area 
of  1200  square  miles  and  a  population  of  about  410,000,  The 
settlement  by  transfer  of  territory  would  not  relieve  the  American 
taxpayer  from  repayment  of  bonds  equivalent  to  the  amount  of 
the  Allied  debt. 

The  objections  to  this  course  are  both  financial  and  political. 
The  price  of  these  grains  of  sand  in  the  Atlantic  Ocean  has  risen 
out  of  all  proportion  to  previous  purchases.  The  United  States 
paid  almost  twice  as  much  for  the  Virgin  Islands  as  for  the 
Lousiana  territory,  and  more  than  3  times  as  much  as  for  Alaska. 
Furthermore,  it  would  be  political  irony  if  the  principle  of  self- 
determination,  which  President  Wilson  made  the  battle  cry  of  the 
war,  should  be  violated  by  the  United  States  after  the  peace.  The 
British  West  Indians  objected  to  the  proposal  to  transfer  them 
from  British  to  American  sovereignty  and  the  British  Foreign 
Office  expressed  its  opposition  in  1920  and  again  in  1921.^^  Any 
transfer  of  these  possessions  might  be  preceded  by  a  plebiscite, 
although  none  was  held  on  the  Virgin  Islands  prior  to  their  trans- 
fer from  Denmark  to  the  United  States.    The  objection  of  financial 

"New  York  Times,  Aug.  21,  and  Sept.  14,  1919. 
"New  York  Times,  Mar.  5,  and  Mar.  6,  1920. 
*°  New  York  Times,  Feb.  14,  1921. 
"Associated  Press  dispatch,  Paris,  June  4,  1920. 

*'New  York  Times,  Oct,  29,  1919,  Mar.  7,  1920,  and  Associated  Press 
dispatch,  London,  Feb.  20,  1921. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       577 

Imperialism  is  directed  against  the  proposal  to  have  Europe  cancel 
claims  against  various  South  American  republics  as  part  payment 
of  the  debt  to  the  United  States. 

iii.  Present  Course 
(a)    The  Law — 

The  Second  Liberty  Bond  Act,  approved  September  24,  191 7, 
authorized  the  Secretary  of  the  Treasury  to  "exercise  in  respect 
to  any  obligations  of  foreign  governments  the  privilege  of  con- 
version into  obligations  bearing  interest  at  a  higher  rate  and  to 
convert  any  short-term  obligations  of  foreign  governments  into 
obligations  maturing  not  later  than  the  bonds  of  the  United  States" 
issued  under  the  First  and  Second  Liberty  Bond  Acts  Section  8 
of  the  Victory  Loan  Act  provides  that  "obligations  of  foreign 
governments  acquired  by  virtue  of  provisions  of  the  First  Libert}^ 
Bond  Act  or  through  the  conversion  of  short-time  notes  acquired 
under  that  Act  shall  mature  not  later  than  June  15,  1 947,  and  that 
all  others  shall  mature  not  later  than  October  15,  1938."  In  a 
letter  dated  September  18,  1919  to  Representative  Fordney,  Secre- 
tary Glass  wrote : 

"With  the  ending  cf  the  war  and  of  the  program  of  our  loans 
to  foreign  governments  it  was  considered  proper  to  take  up  the 
funding  of  the  demand  obligations  now  held  by  the  United  State3 
into  long-time  obligations ;  and  in  view  of  the  fact  that,  as  indicated 
by  a  study  cf  the  foreign  exchanges,  the  reconstruction  of  Europe 
has  not  proceeded  to  a  point  where  Europe  can  pay  by  exports  even 
for  its  necessary  food,  it  was  considered  by  the  Treasury  most 
expedient  that,  as  part  of  the  general  funding  arrangement,  provision 
should  be  made  for  deferring  and  spreading  over  a  later  period  the 
payment  of  interest  which  would  accrue  during  the  next  two  or  three 
years.  .  .  . 

Under  these  circumstances  [of  depreciated  exchange  rates]  an 
impenetrable  barrier  exists  which  makes  it  impracticable  for  these 
governments  to  pay  in  dollars  the  amount  of  interest  due  from  them 
to  the  United  States.  This  involves  no  question  as  to  the  solvency 
or  responsibility  of  these  governments  nor  the  failure  to  raise  funds 
by  loans  and  taxes  from  iheir  people,  and  a  corresponding  burdening 
of  our  people,  but  results  from  the  conditions  of  the  foreign  exchange 
market.  If  the  governments  of  the  Allies  were  to  raise  immediately 
by  taxes  and  loans  the  whole  of  their  debt  to  us,  those  taxes  and 
loans  would  produce  only  sterling,  francs  and  lire,  and  these 
foreign  currencies  would  not  furnish  one  additional  dollar  of  dollar 
exchange,  because  conditions  do  not  permit  those  currencies  now  to 
be  converted  into  dollars.  The  United  States  Treasury  has  no  use 
at  the  present  time  for  any  considerable  amount  of  these  currencies 
and  could  not  afford  to  accumulate  large  idle  foreign  balances."" 

MAnnual  Report  of  the  Secretary  of  the  Treasury, 1920,  p.  60. 


57?        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

(b)   Deferment  of  Interest  Payments — 

The  Secretaiy  pointed  out  that  the  failure  to  defer  the  col- 
lection of  interest  would  further  derange  the  economic  situation 
of  Europe  and  he  was  therefore  most  reluctant  without  specific 
instructions  from  Congress  to  the  contrary  to  demand  the 
immediate  payment  of  interest.  He  asked  the  Ways  and  Mean? 
Committee,  which  shared  with  the  Secretary  of  the  Treasury  the 
initial  responsibility  for  the  Liberty  Loan  Acts,  whether  it  ques- 
tioned his  power  to  "spread  over  subsequent  years  the  interest 
which  would  accrue  during  the  reconstruction  period  and  to  include 
such  amounts  in  the  time  obligations."  The  Committee  replied 
that  there  was  no  legislative  bar  to  the  procedure  proposed.  Nego- 
tiations looking  to  the  deferring  of  interest  and  to  the  change 
of  the  demand  obligations  for  long-time  obligations  were  under- 
taken in  Europe  in  the  fall  of  1919  and  the  spring  of  1 920.  This 
procedure  does  not  solve  the  question ;  it  merely  postpones  the  solu- 
tion. 

(c)   Negotiations  by  the  Secretary  of  the  Treasury — 

Bill  S.2135,  introduced  by  Senator  Boies  Penrose  on  June  23, 
1921,  would  authorize  the  Secretary  of  the  Treasury,  according 
to  the  Majority  Report  of  the  Senate  Committee  on  Finance,  to 
refund  or  concert  and  to  extend  the  time  of  payment  of  the 
principal  or  the  interest,  or  both,  of  any  obligation  of  any  foreign 
Government  now  owing  to  the  United  States  ....  into  bonds 
or  other  obligations  of  such,  or  of  any  other  foreign  Government, 
and  to  receive  bonds  and  obligations  of  any  foreign  Government 
in  substitution  for  those  now  or  hereafter  held  by  the  United 
States.  The  bill  would  provide  that  the  obligations  received  under 
its  provisions  shall  be  in  such  form  and  of  such  terms,  conditions, 
date  or  dates  of  maturity,  and  rate  or  rates  of  interest,  and  with 
such  security,  if  any,  as  shall  be  deemed  by  the  Secretary  of  the 
Treasury,  with  the  approval  of  the  President,  for  the  best  interests 
of  the  United  States. 

The  bill  gives  the  Secretary  of  the  Treasury,  with  the  approval 
of  the  President,  power  to  accept  the  obligations  of  countries  other 
than  the  debtor  countries.  There  has  been  some  discussion  con- 
cerning the  intention  or  thought  on  the  part  of  the  Secretary  of  the 
Treasury  of  accepting  obligations  other  than  those  of  the  debtor 
country,  particularly  German  bonds.    In  the  letter  of  the  Secretary 


THE  INTER- ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       579 

to  Senator  Penrose,  dated  July  26,  1921,  it  is  clearly  stated  that  the 
Secretary  of  the  Treasury  does  not  intend  to  accept  obligations  other 
than  those  of  the  debtor  country  in  the  case  of  the  principal  debtor 
countries  which  owe  the  United  States  in  the  aggregate,  without  ac- 
crued interest,  over  $9,000,000,000;  and  as  to  the  other  debtor  coun- 
tries that  it  is  not  his  intention  to  accept  any  German  bonds  unless 
it  becomes  necessary  or  desirable  to  do  so  in  some  now  unforeseen 
special  cases.  This  bill  provides  for  the  refunding  or  conversion 
of  the  debts  owing  to  the  United  States  by  Czechoslovakia,  Greece, 
Rumania,  Russia,  Serbia,  Poland,  and  other  countries.  These  coun- 
tries also  owe  large  amounts  to  countries  other  than  the  United 
States.  Their  resources  and  their  ability  to  pay  differ  widely 
and  the  conditions  that  will  have  to  be  dealt  with  can  not  be 
foreseen.  It  may  be,  in  the  case  of  some  of  these  countries,  that 
the  Secretary  of  the  Treasurj^,  with  the  approval  of  the  President, 
may  deem  it  advisable  to  accept  obligations  other  than  those  of 
the  debtor  country  in  settlement  of  their  debts  to  the  United 
States.  68=1 

The  bill  gives  no  authority  to  cancel  any  part  of  the  indebted- 
ness of  any  foreign  government  to  the  United  States.  The 
Secretary  repeatedly  and  vigorously  denied  his  intention  or  v/illing- 
ness  to  cancel  any  part  of  the  debt.  The  single  formula  embodied 
in  the  Victory  Bond  Act  was  too  rigid  to  permit  com.plete  nego- 
tiation. 

iv.   Ultimate  Course 

(a)   Not  an  American  but  an  International  Problem — 

The  disposition  of  the  inter-Allied  debts  is  not  an  American 
problem.  It  is  an  international  one.  The  debt  of  Great  Britain 
to  the  United  States  is  approximately  equal  to  the  advances  made 
by  Great  Britain  to  the  Allies  after  the  entry  of  the  United  States 
into  the  war.  At  the  time  of  these  advances  to  Great  Britain  her 
statesmen  urged  that  America  lend  to  the  other  Allies  directly — 
a  course  which  was  later  adopted.  Similarly,  France  made  loans 
to  the  governments  of  the  lesser  Allies  which  are  a  partial  offset 
to  her  borrowings  from  Great  Britain  and  from  the  United  States. 

^*^  Report  of  the  Majority  of  the  Committee  on  Finance  on  bill  S.  2135 
empowering  the  Secretary  of  the  Treasury  to  refund  the  obligations  of 
Foreign  Governments.  Calendar  275.  Senate  Report  264.  67th  Congress, 
ist  Session. 


S8o        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

The  international  character  of  these  advances  was  stressed  at  the 
conferences  at  Lympne  and  Hythe,  in  May,  1920.  The  official 
statement  issued  at  the  end  of  deliberations  read: 

"The  British  and  French  governments  are  of  the  opinion  that 
in  order  to  provide  a  solution  for  the  economic  difficulties  which 
are  gravely  weighing  upon  the  general  situation  of  the  world  .  .  . 
it  is  necessary  to  arrive  at  a  settlement  which  shall  embrace  the 
whole  body  of  the  international  liabilities  which  have  been  left 
as  a  legacy  of  the  war,  and  which  shall  at  the  same  time  insure 
a  parallel  liquidation  of  the  intei'-Allied  war  debt  and  of  the 
reparation  debts  of  the  Central  Empires." 

The  settlement  of  the  inter-Allied  debt  is  not  solely  an  Ameri- 
can problem,  because  it  is  intimately  connected  with  the  determina- 
tion of  the  amount  of  the  indemnity  and  with  the  method  of  its 
collection.  At  the  Hythe  Conference  a  tentative  agreement  was 
reached  between  Premiers  Lloyd  George  and  Millerand  under 
which  the  liquidation  of  the  inter-Allied  debts  should  be  regulated 
by  the  rate  and  extent  to  which  Germany  met  the  liability  imposed 
upon  her  by  the  Reparations  Commission.  The  object  of  this 
agreement  was  to  reconcile  France  to  the  moderation  of  the  terms 
of  the  indemnity  and  to  the  adoption  of  less  rigorous  methods  of 
enforcing  the  treaty.  However,  America's  refusal  to  consider  the 
cancellation  of  the  debt  compelled  the  abandonment  of  the  arrange- 
ment between  the  premiers,  for  it  would  have  shifted  the  entire 
burden  to  Great  Britain.  In  view  of  her  heavy  indebtedness  to 
the  United  States,  Great  Britain  could  not  agree  to  the  postpone- 
ment or  the  cancellation  of  inter-Allied  obligations  to  her.  At  the 
Paris  conference  to  fix  the  amount  of  the  German  indemnity, 
Premier  Lloyd  George  made  a  clear  statement  on  the  inter-Allied 
war  debts: 

"There  must  be  a  general  arrangement.  We  owe  to  America, 
France  owes  us ;  other  nations  owe  France.  No  solution  is  possible 
while  America  remains  outside  the  discussion.  Meanwhile,  let 
us  act  as  if  the  debts  did  not  exist.  If  the  creditor  does  not  worry 
me,  I  do  not  worry  the  debtor."  ^^ 

(b)    Cancellation  Not  a  Panacea — 

As  was  shown  above,  the  cancellation  of  the  American  debt 
will  not  make  the  budgets  of  the  European  governments  balance. 

"Associated  Press  dispatch,  Paris,  Jan.  30,  1921. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       581 

The  interest  on  the  debt  to  the  United  States  is  not  the  sole  or 
even  an  important  cause  of  the  deficit.  Furthermore,  the  demand 
for  dollar  exchange  to  pay  the  interest  on  the  debt  is  not  the  sole 
or  even  an  important  cause  of  the  depreciation  of  the  exchanges. 
The  increase  of  the  excess  of  imports  of  the  countries  of  Europe 
in  the  post-war  years  over  the  pre-vi^ar  years  is  many  times  larger 
than  the  interest  on  the  debt  to  the  United  States  government. 
Finally,  the  deferment  of  the  interest  on  the  debt  during  the 
period  of  reconstruction  has  temporarily  the  identical  effect  of 
cancellation.  In  effect,  the  United  States  has  canceled  for  three 
years  the  debt  of  the  foreign  governments. 

The  repeated  requests  by  the  spokesmen  of  the  foreign  govern- 
ments for  the  cancellation  of  the  debt  to  the  United  States  hide 
the  real  issue.  The  cancellation  of  loans  would  be  treating  the 
symptoms  of  the  financial  disease  in  Europe.  The  cause  is  more 
fundamental.  As  the  Brussels  Financial  Conference  reports  clearly 
pointed  out,  Europe  requires  primarily  peace,  a  cessation  of  military 
operations^  and  preparations,  the  restoration  of  the  economic  unity 
of  Europe,  the  removal  of  the  economic  frontiers  between  the 
succession  states  of  the  Austro-Hungarian  Empire,  the  resumption 
of  trade  with  Russia,  reciprocity  in  most-favored-nation-treatment 
of  Germany,  and  the  revision  of  the  treaty  to  permit  the  revival 
of  economic  life  in  Germany  and  thereby  in  Europe.  These  needs 
indicate  but  a  few  of  the  fundamental  maladjustments  in  European 
affairs  which  are  delaying  the  return  to  normal  conditions.  As 
Norman  Angell  pointed  out  in  "The  Great  Illusion": 

"Wealth  in  the  civilized  world  is  founded  upon  credit  and 
commercial  contract.  If  these  are  tampered  with  by  a  conqueror, 
the  credit-dependent  wealth  not  only  vanishes,  thus  giving  the 
conqueror  nothing  by  his  conquest,  but  in  its  collapse  involves  the 
conqueror." 

Those  who  stress  the  importance  of  the  cancellation  of  the 
inter-Allied  debts  overlook  the  basic  difficulty  that  the  budgets  of 
Europe  are  awry,  and  that  two  years  after  the  armistice  their 
currencies  are  still  being  inflated.  The  cancellation  of  the  inter- 
Allied  debts  is  not  the  first  step  in  the  convalescence  of  Europe. 
It  may  be  the  last,  particularly  if  the  nations  of  Europe  proceed 
of  their  own  accord  to  fulfill  the  prerequisite  conditions  above 
mentioned. 


$82        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

(c)  Cancellation  not  an  Unconditional  Gift — 
Cancellation  is  not  a  right  due  to  Europe  nor  should  it  be  an 

unconditional  gift  by  the  United  States,  should  subsequent  events 
prove  the  inability  of  Europe  to  pay.  Although  America's 
unstinted  support  of  the  war  and  the  absence  of  any  selfish  request 
of  hers  at  the  peace  conference  entitled  her  to  demand  a  just  settle- 
ment, her  spokesmen  were  defeated  on  several  important  principles. 
America  should  not  blindly  surrender  the  remaining  hostage  for  a 
righteous  peace,  the  war  debts  of  Europe,  the  last  remnant  of  a 
once  powerful  influence  for  good  in  European  affairs. 

(d)  Prerequisites  of  Settlement — 

Although  the  temper  of  the  Congress  and  of  the  country  are 
largely  opposed  to  the  cancellation  of  the  debt,  conditions  in 
Europe  may  prevent  its  payment  either  at  the  end  of  the  three 
years  of  grace  or  at  any  time.  Future  conditions  may  necessitate 
the  modification  of  the  debt  of  the  smaller  powers.  This  course 
should  be  strictly  conditioned  upon  such  action  by  the  Allied 
governments  as  will  hasten  the  recovery  of  Europe  and  the  return 
of  stable  economic  conditions,  particularly  in  Central  Europe. 

If  America  is  to  modify  the  debt,  one  of  the  conditions  precedent 
ought  to  be  a  decided  moderation  of  the  indemnity.  Probably 
because,  as  Mr.  Lamont  pointed  out,  '^  both  the  President  and  his 
advisors  were  unqualifiedly  opposed  to  the  Allied  proposals  for 
the  cancellation  of  the  American  debt,  the  peacemakers  at  Paris 
were  unable  to  agree  upon  a  moderate  indemnity  within  the 
capacity  of  Germany  to  pay.  Had  they  done  so  perhaps  Europe 
would  have  been  on  the  road  to  recover^'  shortly  after  the  ratifica- 
tion of  the  treaty  by  the  Allied  powers.  It  may  still  be  possible 
for  America  to  dictate  a  workable  economic  program  to  the  belli- 
cose and  chauvinist  states,  created  or  enlarged  by  the  treaty. 

The  revision  of  the  treaty  in  the  phases  suggested  by  Keynes, 
Angell,  Brailsford,  Noyes,  Bass  and  others  as  essential  to  the 
restoration  of  Germany  and  the  revival  of  Europe  may  be  brought 
about  by  the  United  States.  We  may  be  "buying  moderation  and 
common  sense"  at  the  cost  of  a  part  of  the  debt  of  the  weaker 
debtor  powers.  However,  unless  the  United  States  is  willing  to 
make  concessions  it  cannot  expect  Europe,  which  is  bearing  a  far 
heavier  burden,  to  do  so.    Perhaps  the  modification  of  the  debt  by 

"Associated  Press  dispatches,  Feb.  i6,  1921. 


THE  INTER-ALLIED  DEBTS — SHALL  THEY  BE  CANCELED?       583 

America  may  help  check  the  rampant  imperialism  in  Europe,  which 
by  no  means  died  when  Germany  was  defeated.  The  modification 
of  a  part  of  our  debt  should  be  conditioned  upon  the  acceptance 
of  a  disarmament  program.  Otherunse  the  release  of  some  of  the 
European  countries  from  their  present  heavy  burdens  may  be  an 
incentive  to  resume  aggressive  military  policies. 

V.   The  Need  of  an  American  Foreign  Policy 

The  balancing  of  the  pros  and  cons  of  the  argument  indicate 
that  several  debtors  will  ultimately  be  able  to  pay.  However, 
future  conditions  in  the  smaller  of  the  debtor  states  may  make 
modification  unavoidable.  If  the  Issue  is  pressed  in  the  immediate 
future,  the  American  government  should  insist  on  the  fulfillment 
of  certain  conditions,  which  will  make  for  the  restoration  of 
economic  stability  In  Europe  and  of  world  peace. 

Such  a  constructive  program,  however,  implies  that  there  Is 
a  definite  American  policy.  Unfortunately,  such  is  not  the  case. 
Changes  of  administration  always  mean  changes  of  policy  and  fre- 
quently a  sudden  break.  During  his  election  campaign  Mr.  Hard- 
ing stated  that  there  would  be  a  "complete  reversal  in  our  foreign 
policy."^^  In  Europe,  where  policies  are  maintained  consistently 
for  generations  even,  statesmen  are  bewildered  by  the  sudden  volte 
face  in  American  diplomacy.  Whatever  be  the  details  of  the 
policy  of  the  Harding  administration  one  issue  stands  clear — the 
desirability  of  Anglo-American  friendship. 

At  the  end  of  the  Napoleonic  wars,  when  Lord  Liverpool  was 
the  spokesman  of  a  powerful  public  opinion  in  urging  the  dismem- 
berment of  France,  Lord  Castlereagh  wrote,  "It  is  not  our  business 
to  collect  trophies  but  to  bring  the  world  back  to  peaceful  habits. 
...  I  do  not  believe  this  (peace)  to  be  compatible  with  any 
attempt  now  permanently  or  materially  to  affect  the  territorial 
character  of  France  .  .  .  neither  do  I  make  it  a  clear  case  that 
France  even  with  her  existing  dimensions  may  not  be  found  a 
useful  rather  than  a  dangerous  member  of  the  European  system." 
Substitute  Germany  for  France  and  the  words  are  as  true  to-day 
as  one  hundred  years  ago.  British  diplom.acy  is  not  intransigent. 
It  need  give  vent  to  no  hate.  It  seeks  trade,  now  If  ever  not  an 
unworthy  policy.    The  restoration  of  Europe  requires  calm  vision, 

"New  York  Times,  Aug.  17,  1920. 


584        INTERNATIONAL    FINANCE   AND    ITS    REORGANIZATION 

arbitration  of  differences,  and  cooperation  with  former  enemies. 
The  British  have  shown  their  capacity  in  this  direction.  The 
reconciliation  with  the  Boers  and  their  loyal  support  of  England 
in  the  recent  great  crisis,  and  more  recently  the  restoration,  earliest 
among  the  Allied  powers,  of  alien  property  sequestered  during  the 
World  War,  are  evidences  of  the  British  policy  of  peace  and 
moderation. 

In  spite  of  the  minor  points  of  difference  between  Great  Britain 
and  the  United  States,  they  must  cooperate  if  the  world  is  to 
have  peace.  The  decision  on  cancellation  of  the  inter-Allied  debts 
depends  upon  the  furtherance  of  this  primary  aim  in  American 
foreign  policies — Anglo-American  unity  to  preserve  the  peace  of 
the  world  and  to  restore  its  economic  functioning. 


CHAPTER  XVI 

THE  GERMAN  INDEMNITY 

Historic  precedents  are  lacking  for  the  huge  indemnity  imposed 
upon  Germany.  After  the  Napoleonic  Wars  defeated  France  had 
to  pay  only  about  $140  million.  England  was  responsible  for  the 
moderation  of  the  terms  in  spite  of  the  fact  that  the  British  debt 
in  18 1 7  was  about  $4240  million  and  the  Frefich  debt  was  less 
than  one-quarter  as  great.  Prussia  on  the  other  hand  was  in  favor 
of  imposing  a  higher  indemnity  because  the  value  of  the  property 
requisitioned  by  Napoleon  in  Prussia  amounted  to  more  than  twice 
the  total  indemnity. 

A.  The  French  Indemnity  of  1871 

The  indemnity  paid  to  Germany  by  France  in  1871  affords  an 
interesting  parallel  to  and  some  striking  differences  from  the  present 
German  indemnity. 

i.  The  Facts 

The  preliminary  peace  terms,  signed  in  February,  187 1,  called 
for  the  payment  of  an  indemnity  of  fr.  5000  million.  The  Treaty 
of  Frankfort,  signed  May  10,  1871,  stipulated  that  payment  be 
made  as  fellows:  Fr.  500  million  thirty  days  after  the  restoration 
of  order  in  Paris;  fr.  looo  million  during  1871;  fr.  500  million 
before  May  i,  1872;  fr.  3000  million  before  March  2,  1874.  The 
last  item  bore  interest  at  the  rate  of  5  per  cent,  and  might  be 
anticipated.  The  form  of  payment  might  be  in  gold  or  silver, 
notes  of  the  central  banks  of  England,  Prussia,  Netherlands,  or 
Belgium,  or  prime  bills  of  exchange.  There  were  three  steps  in 
this  large  banking  operation.  First  the  French  Government  had 
to  obtain  credit,  then  the  proceeds  had  to  be  converted  into  a 
form  acceptable  to  the  German  Government,  and  finally  the  credit 
had  to  be  transferred  to  Germany.  As  part  payment  on  account, 
France  was  credited  with  fr.  325  million,  the  value  of  the  Rail- 

585 


586        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

road  Company  of  the  East  situated  in  the  territory  annexed,  and 
fr.  98,400  paid  on  account  by  the  city  of  Paris.  Subsequent  to 
the  signing  of  the  treaty  Germany  agreed  to  accept  payment  in 
notes  of  the  Bank  of  France  for  fr.  125  million.  These  items 
totaled  fr.  450,098,400,  leaving  a  balance  of  fr.  4,549,901,600, 
which  with  interest  of  fr.  301,145,078  made  a  final  balance  of  fr. 
4,851,046,678. 

To  meet  this  demand,  France  raised  a  loan  of  fr.  2225  million 
in  1 87 1  and  fr.  3500  million  in  1872,  which  furnished  the  means 
of  paying  the  indemnity.  The  loans  were  heavily  oversubscribed. 
Fifty-nine  per  cent  of  the  second  loan  was  taken  by  foreigners. 
Only  a  small  portion  of  the  payment  of  the  indemnity  was  in 
coin  or  specie  and  the  larger  part  was  in  bills  of  exchange.  Pay- 
ments were  divided  into  three  groups.^ 

I.  Allowances:  Francs 

On  account  of  Railroad  Company  of  the  East       325,000,000 

Payment  by  the  City  of  Paris 98,400 

Total 325,098,400 

II.  Specie,  Coin  and  Notes: 

Bank  of  France  notes 1 25,000,000 

German  notes  and  coin 105,039,145 

French  gold  coin 273,003,058 

French  silver  coin 239,291,876 

Total 742,334,079 

m.  Bills  of  Exchange: 

German 2,799,514,184 

Other  than  German 1,448,812,190 

Total 4,248,326,374 

Grand  total S.3i5>7S8,853 

The  method  of  raising  the  funds  was  similar  to  that  used  by 
Great  Britain  in  the  late  war — the  foreign  securities  owned  by 
native  investors  were  replaced  by  bonds  of  the  home  government, 
which  paid  the  former  against  debits  abroad.  France  obtained 
bills  of  exchange  on  many  countries  by  offering  its  own  bonds  to 

*Liesse,  Andre,  Evolution  of  Credit  and  Banks  in  France.  Report  of 
National  Monetary  Commission,  Washington,  1909,  pp.  150-160.  Conant, 
C.  A.,  History  of  Modern  Banks  of  Issue.  New  York:  G.  P.  Putnam, 
'915.  PP-  56-60.  Monroe,  Arthur  E.,  The  French  Indemnity  of  1871  and 
Its  Effects,  Harvard  Review  of  Economic  Statistics,  Prelim.  Vol.  I,  1919. 
pp.  269-281.  Say,  Leon,  Rapport  sur  le  Paiement  de  I'lnderanite  de  Guerre, 
in  Les  Finances  de  la  France,  I,  p.  363. 


THE    GERMAN    INDEMNITY 


587 


foreigners,  who  subscribed  liberally,  and  France  also  bought  foreign 
bills  in  the  open  market  through  an  exchange  operation  with  the 
underwriting  bankers.  The  effect  on  the  foreign  exchange  market 
was  slight. 

ii.  A  Comparison  of  the  Indemnities  of  187 1  and  192 1 

There  are  many  points  of  similarity  between  the  indemnity 
that  Germany  imposed  upon  France  after  the  Franco-Prussian  War 
and  the  indemnity  that  the  Allies  plan  to  impose  upon  Germany 
after  the  World  War.  In  fact,  the  draft  of  the  treaty  of  peace 
with  Germany  is  in  parts  based  specifically  upon  the  precedent  of 
1 87 1.  For  example,  articles  255  and  256  of  the  recent  treaty 
read  that  "inasmuch  as  in  1871  Germany  refused  to  undertake 
any  portion  of  the  burden  of  the  French  debt,  France  shall  be, 
in  respect  of  Alsace-Lorraine,  exempt  from  any  pa3'ment"  of  the 
German  debt,  "In  view  of  the  terms  on  which  Alsace-Lorraine 
was  ceded  to  Germany  in  1 871,  France  shall  be  exempt  from 
making  any  payment  of  credit  for  any  property  of  the  German 
Empire  situated  therein."  Both  indemnities  are  alike  in  that  pay- 
ment by  installments  is  provided  for,  credit  is  allowed  on  account 
of  the  army  of  occupation,  and  deductions  made  for  property 
seized  by  the  victorious  power. 

But  there  are  trenchant  differences.  The  war  between  Ger- 
many and  France  lasted  from  July,  1870,  until  February,  187 1. 
The  World  War  was  over  four  years  in  duration.  The  Franco- 
Prussian  War  was  not  attended  by  the  depreciation  of  industrial 
equipment  and  utter  destruction  of  foreign  trade  that  characterized 
the  World  War.  After  1871  France  enjoyed  very  high  credit 
abroad.  Foreigners  subscribed  heavily  to  the  post-war  loan  that 
liquidated  the  indemnity.  Her  foreign  trade  increased  greatly, 
and  her  balance  of  imports  was  replaced  by  a  balance  of  exports 
after  1871. 

French  Foreign  Trade 
(in  million  francs) 


Year 

Imports 

Exports 

Total 

Balance 

1870 
1871 
1872 

2867 
3566 
3570 

2802 
2872 
3762 

5669 
6439 
7332 

-  65 
-694 
+  192 

588        INTERNATIONAL    FINANCE   AND    ITS    REORGANIZATION 

Germany's  foreign  trade  after  the  World  War  is  a  small  frac- 
tion of  her  pre-war  trade.  Her  machinery  of  commerce  has  either 
been  taken  over  by  the  victorious  powers  or  else  replaced  by  that 
of  other  nations.  Furthermore,  prolonged  shortage  of  goods  in 
Germany  makes  it  necessary  to  postpone  exports  until  the  home 
demand  has  been  reasonably  satisfied. 

The  French  indemnity,  though  huge  as  compensation,  is  in- 
significant (about  3  per  cent)  compared  with  the  present  indemnity. 
The  former  could  be  liquidated  in  gold  and  bills  of  exchange.  The 
latter  cannot.  Even  though  the  German  indemnity  is  fixed  at  132 
billion  gold  marks,  payment  in  gold  metal  would  require  about 
four  times  the  world's  total  gold  supply.  There  w^ould  not  be  a 
sufficient  number  of  bills  of  exchange  available  to  her  credit  to 
pay  the  indemnity.  Besides,  Germany's  credit  is  so  low^  that  she 
cannot  command  extensive  credit  abroad.  The  German  indemnity 
must  therefore  be  paid  in  goods,  by  means  of  an  excess  of  exports 
over  a  series  of  years. 

German  savings  would  not  be  available  for  meeting  the 
indemnity  as  the  French  savings  were.  Whereas  paper  savings,  or 
deposits,  have  increased  in  Germany,  the  economic  surplus  has  not 
risen.  The  increase  in  savings  measures  merely  the  depreciation 
of  the  currency.  In  1871  the  French  savings  represented  real 
assets,  which  were  willingly  put  at  the  disposal  of  the  government. 
Since  the  military  collapse  of  Germany,  the  morale  of  the  people 
has  been  broken  and  their  confidence  in  the  finances  of  the  gov- 
ernment is  impaired. 

B.  Estimates  of  Property  Damage 

The  estimates  of  property  damage  vary  greatly.  According 
to  Keynes,  the  total  amount  of  physical  and  material  damage  in 
northern  France  was  about  $2500  million.  Rene  Pupin,  the 
French  statistician,  set  the  material  losses  at  2000  to  3000  million 
dollars.^  Official  committees  were  appointed  by  Germany  and 
France  to  estimate  the  war  damage  in  northern  France.    The  Ger- 

^  Keynes,  ibid.,  pp.  127,  129.  See  also  Lapradelle,  G.  de,  Les  Conse- 
quences Economiques  de  la  Paix. 

Revue  Politique  et  Parliamentaire,  June  10,  1920,  pp.  309-330,  a 
criticism  of  Keynes'  figures. 

Streel,  E.  du  V.  de  Les  reparations  financieres  dues  a  la  France, 
Revue,   July   10,    1920,   pp.  26-40. 


THE    GERMAN    INDEMNITY 


589 


man  estimate  was  mk.  7228  million  gold  or  about  $1720  million. 
The  French  estimate  according  to  M.  Louis  Dubois  of  the  Repara- 
tions Commission,  was  fr.  62,034  million  gold,  or  about  $ii,975 
million,  as  follows:  ^ 


French 

estimate. 

Million 

francs 

German 
estimate, 
Million 
marks 

Industrial  establishments  and  mines 

Habitation  and  monuments 

7,260 

29,000 

16,295 

1,488 

3,919 

1,572 

2,500 

0 

1203 
2760 

67s 

209 

405 

97 

0 

Agriculture  irrif^ation  etc     

Railways,  post,  telephone  and  telegraphs 

Portable  property  confiscated 

1870 

Total   

62,034 

7228 

Estimates  made  by  several  French  ofKcials  are  considerably  higher. 
M.  Dubois,  of  the  Budget  Commission  of  the  Chamber  of  Depu- 
ties, estimated  a  minimum  of  $13,000  million  without  counting 
war  levies,  losses  at  sea,  roads  or  public  monuments.  M.  Loucher, 
Minister  of  Industrial  Reconstruction,  figured  that  the  reconstruc- 
tion of  the  devastated  areas  would  cost  $15,000  million,  or  more 
than  double  the  entire  wealth  of  the  inhabitants,  as  estimated  by 
M.  Pupin,  M.  Klotz  set  the  damage  to  French  property  at 
$26,800  million,  including  losses  at  sea,  but  not  pensions  and 
allowances.  The  French  claims  as  finally  submitted  to  the  Repara- 
tions Commission  amounted  to  218,541  million  paper  francs  of 
which  damage  to  property  constituted  64.4  per  cent,  pensions  and 
allowances  33.6  per  cent  and  reimbursement  to  civilians  2.0  per 
cent. 

The  total  losses  to  all  the  Allies  as  estimated  by  Mr.  Keynes 
amounted  to  $10,650  million,  distributed  as  follows:  Belgium, 
$2550  million,  France  $4000  million.  Great  Britain,  $2850  million, 
and  other  Allies,  $1250  million.  If,  notwithstanding  tlie  clear 
terms  of  the  armistice,  pensions  and  allowances  should  be  included, 
the  added  losses  to  the  Allies  would  equal  about  $25,000  million. 


*Le  Matin,  Aug.  i,  1920. 


590        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

C.  Proposed  Indemnity 

i.   Treaty  Provisions 

Under  the  terms  of  the  treaty,  the  amount  of  the  indemnity 
was  left  indeterminate.  The  American  and  some  British  experts 
submitted  a  low  figure,  the  French  and  some  other  British  experts 
submitted  high  figures.  Agreement  at  the  time  was  impossible  and 
the  determination  of  the  amount  was  postponed.  The  American 
justification  of  this  procedure  was  that  on  sober  second  thought 
the  Allies  would  consent  to  a  moderate  sum;  the  theory  of  the 
French  was  that  as  Germany  recovered  they  could  collect  addi- 
tional amounts.  Furthermore,  the  French  war  cabinets  had  made 
extravagant  promises  to  the  electorate  and  the  determination  of  a 
moderate  sum  w^ould  have  embarrassed  the  politicians. 

The  terms  of  the  treaty  provided  for  the  payment  of  $5000 
million,  before  May  I,  1 92 1,  but  deduction  might  be  made  for  the 
cost  of  the  armies  of  occupation  and  such  supplies  of  food  and  raw 
materials  as  the  Allies  should  judge  essential  to  enable  Germany 
to  meet  her  obligations  for  reparation.  Payment  amounting  to 
$10,000  million  and  any  balance  of  the  first  $5000  million  was 
to  be  made  before  May  i,  1921,  in  bonds  bearing  interest  at  the 
annual  rate  of  2 J/2  per  cent  from  1921  to  1925  and  5  per  cent 
plus  I  per  cent  for  amortization  thereafter.  If  the  Reparation 
Commission  believed  that  Germany  could  pay  a  larger  sum  an 
additional  $10,000  million  of  5-per  cent  bonds  was  to  be  issued 
by  Germany. 

The  articles  on  reparations  under  Part  VIII  of  the  Treaty  of 
Peace,  read: 

Section  I 

General  Provisions 

Article  231 

The  Allied  and  Associated  Governments  affirm  and  Germany 
accepts  the  responsibility  of  Germany  and  her  allies  for  causing  all 
the  loss  and  damage  to  which  the  Allied  and  Associated  Govern- 
ments and  their  nationals  have  been  subjected  as  a  consequence  of  the 
war  imposed  upon  them  by  the  aggression  of  Germany  and  her 
allies. 


THE    GERMAN    INDEMNITY  59I 

Article   232 

The  Allied  and  Associated  Governments  recognize  that  the  re- 
sources of  Germany  are  not  adequate,  after  taking  into  account 
permanent  diminutions  of  such  resources  which  will  result  from  other 
provisions  of  the  present  Treaty,  to  make  complete  reparation  for 
all  such  loss  and  damage. 

Article   233 

The  findings  of  the  Commission  as  to  the  amount  of  damage 
defined  as  above  shall  be  concluded  and  notified  to  the  German 
Government  on  or  before  May  i,  1921,  as  representing  the  extent 
of  that  Government's  obligations. 

The  Commission  shall  concurrently  draw  up  a  schedule  of  pay- 
ments prescribing  the  time  and  manner  for  securing  and  discharging 
the  entire  obligation  within  a  period  of  thirty  years  from  May  i, 
1921.  If,  however,  within  the  period  mentioned,  Germany  fails  to 
discharge  her  obligations,  any  balance  remaining  unpaid  may,  within 
the  discretion  of  the  Commission,  be  postponed  for  settlement  in 
subsequent  years,  or  may  be  handled  otherwise  in  such  manner  as 
the  Allied  and  Associated  Governments,  acting  in  accordance  with 
the  procedure  laid  down  in  this  Part  of  the  present  Treaty,  shall 
determine. 

Article  234 

The  Reparation  Commission  shall  after  May  1,  1921,  from  time  to 
time,  consider  the  resources  and  capacity  of  Germany,  and,  after 
giving  her  representatives  a  just  opportunity  to  be  heard,  shall  have 
discretion  to  extend  the  date,   and  to  modify  the  form  of  payments. 

Article  236 

Germany  further  agrees  to  the  direct  application  of  her  economic 
resources  to  reparation  as  specified  in  Annexes,  III,  IV,  V,  and  VI, 
relating  respectively  to  merchant  shipping,  to  physical  restoration, 
to  coal  and  derivatives  of  coal,  and  to  dyestuffs  and  other  chemical 
products ;  provided  always  that  the  value  of  the  property  transferred 
and  any  services  rendered  by  her  under  these  Annexes,  assessed  in 
the  manner  therein  prescribed,  shall  be  credited  to  her  towards 
liquidation  of  her  obligations  under  the  above  Articles. 

Article   237 

The  successive  instalments,  including  the  above  sum,  paid  over 
by  Germany  in  satisfaction  of  the  above  claims,  will  be  divided  by 
the  Allied  and  Associated  Governments  in  proportions  which  have 
been  determined  upon  by  them  in  advance  on  a  basis  of  general 
equity  and  of  the  rights  of  each. 

Article    238 

In  addition  to  the  payments  mentioned  above  Germany  shall 
effect,  in  accordance  with  the  procedure  laid  down  by  the  Reparation 
Commission  restitution  in  cash  of  cash  taken  away,  seized  or  seques- 
trated, and  also  restitution  of  animals,  object!  of  every  nature  and 


592        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

securities  taken  away,  seized  or  sequestrated,  in  the  cases  in  which  it 
proves  possible  to  identify  them  in  territory  belonging  to  Germany 
or  her  Allies. 

ANNEX    I 

Compensation  may  be  claimed  from  Germany  under  Article  232 
above  in  respect  of  the  total  damage  under  the  following  categories: 

(i)  Damage  to  injured  persons  and  to  surviving  dependents  by 
personal  injury  to  or  death  of  civilians  caused  b}'  acts  of  war,  includ- 
ing bombardments  or  other  attacks  on  land,  on  ^a,  or  from  the  air. 

(7)  Allowances  by  the  governments  of  the  Allied  and  Associated 
Powers  to  the  families  and  dependents  of  mobilised  persons  or 
persons  serving  with  the  forces. 

(10)  Damage  in  the  form  of  levies,  fines  and  other  similar  exac- 
tions imposed  by  Germany  or  her  allies  upon  the  civilian  population. 

ANNEX  II 


(a)  Whatever  part  of  the  full  amount  of  the  proved  claims  is 
not  paid  in  gold,  or  in  ships,  securities  and  commodities  or  other- 
wise, Germany  shall  be  required,  under  such  conditions  as  the 
Commission  may  determine  to  cover  by  way  of  guarantee  by  an 
equivalent  issue  of  bonds,  obligations  or  otherwise,  in  order  to 
constitute  an  acknowledgment  of  the  said  part  of  the  debt. 

(b)  In  periodically  estimating  Germany's  capacity  to  pay,  the 
Commission  shall  examine  the  German  system  of  taxation,  first,  to 
the  end  that  the  sums  for  reparation  which  Germany  is  required  to 
pay  shall  become  a  charge  upon  all  her  revenues  prior  to  that  for 
the  service  or  discharge  of  any  domestic  loan,  and  secondly,  so  as 
to  satisfy  itself  that,  in  general,  the  German  scheme  of  taxation  is 
fully  as  heavy  proportionately  as  that  of  any  of  the  Powers  repre- 
sented on  the  Commission. 

(c)  In  order  to  facilitate  and  continue  the  immediate  restoration 
of  the  economic  life  of  the  Allied  and  Associated  countries,  the  Com- 
mission will  take  from  Germany  by  way  of  security  for  and  acknowl- 
edgment of  her  debt  a  first  instalment  of  gold  bearer  bonds. 

(i)  To  be  issued  forthwith,  mk.  20,000,000,000  gold  bearer  bonds, 
payable   not   later  than  May  i,   1921,  without  interest. 

(2)  To  be  issued  forthwith,  further  mk.  40,000,000,000  gold  bearer 
bonds,  bearing  interest  at  2^>  per  cent  per  annum  between  1921  and 
1926,  and  thereafter  at  5  per  cent  per  annum  with  an  additional  i 
per  cent  for  amortisation  beginning  in  1926  on  the  whole  amount  of 
the  issue. 

(3)  To  be  delivered  forthwith  a  covering  undertaking  in  writ- 
ing to  issue  when,  but  not  until,  the  Commission  is  satisfied  that 
Germany  can  meet  such  interest  and  sinking-fund  obligations,  a 
further  instalment  of  mk.  40,000,000,000  gold  5-per  cent  bearer  bonds, 
the  time  and  mode  of  payment  of  principal  and  interest  to  be 
determined  by  the  Commission.  Further  issues  by  tray  of  acknoivl- 
edgmcnt  and  security  may  be  required  as  the  Commission  subse- 
quently determines  from  time  to  time. 


THE    GERMAN    INDEMNITY  593 

IS 

The  measures  which  the  Allied  and  Associated  Powers  shall  have 
the  right  to  take,  in  case  of  voluntary  default  by  Germany,  and  which 
Germany  agrees  not  to  regard  as  acts  of  war,  may  include  economic 
and  financial  prohibitions  and  reprisals  and  in  general  such  other 
measures  as  the  respective  governments  may  deter/nine  to  be  neces- 
sary in  the  circumstances. 


ii.   The  Hythe  Conference 

At  the  conference  between  Premiers  Lloyd  George  and  Mil- 
lerand  at  Hythe  on  May  i6,  1920,  certain  tentative  proposals 
were  put  forward.  A  lump  sum,  120  billion  gold  mk.,  about 
$28,560  million,  was  to  have  been  fixed  as  the  minimum  German 
indemnity  and  payments  of  the  inter-Allied  war  debts  were  to  be 
made  when  and  as  Germany  paid  instalments  on  the  indemnity. 
The  Allies  were  to  make  a  loan  to  Germany  provided  the  United 
States  guaranteed  the  loan,  and  France  expected  American  bankers 
to  discount  her  portion  of  the  German  indemxnity.  The  Hythe 
conference  announced  as  its  aim  "to  arrive  at  a  settlement  which 
shall  embrace  the  whole  body  of  the  international  liabilities  left  as 
a  legacy  of  the  war  and  which  shall  insure  a  parallel  liquidation 
of  the  inter-Allied  war  debt."  The  failure  of  the  United  States 
government  to  participate  at  the  conference  set  at  nought  the  pro- 
posals for  inter-Allied  financial  co-operation. 

iii,  Boulogne  and  Spa  Conferences 

At  the  conference  at  Boulogne  on  June  21-22,  1920,  the  plan 
for  parallel  liquidation  of  inter-Allied  debts  and  reparations  claims 
was  discarded,  the  distribution  of  the  indemnity  was  not  fixed, 
and  no  amount  w^as  agreed  upon.  A  French  proposal  provided 
for  a  total  of  269,000  million  gold  marks,  payable  in  42  years  in 
instalments.  In  view  of  the  fact  that  the  Reparation  Commission 
was  empowered  to  vary  the  interest  and  that  the  Allies  would 
have  to  borrow  at  high  rates  for  reconstruction  purposes,  a  rate  of 
8  per  cent  was  taken  in  the  calculations.  Allowing  8  per  cent  for 
interest  and  i  per  cent  for  amortization,  the  present  value  would 
be  85,000  million  gold  marks.  At  the  Brussels  meeting  of  the 
Premiers  on  July  2,  1920,  the  discussion  was  based  on  a  figure  of 
120,000  million  gold  marks  at  present  value.    At  the  Conference 


594        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

at  Spa,  Belgium,  on  July  17,  1920,  a  revised  distribution  was 
finally  put  into  effect,  under  which  the  indemnity  was  allocated 
as  follows: 

Per  cent 

France 52 

Great  Britain 22 

Italy 10 

Belgium 8 

Roumania  1 

Seivia         > 6^ 

Poland       J 

Japan  and  Portugal 15 

Total 100 

iv.  Paris  Conference 

On  January  27,  1921,  the  first  day  of  the  Paris  conference, 
M.  Doumer,  French  Minister  of  Finance,  named  212,000  million 
gold  marks  as  the  French  estimate  of  the  total  amount  of  the 
German  indemnity.  Mr.  Lloyd  George  very  clearly  pointed  out 
the  impossibility  of  realizing  any  such  figure.  However,  before 
the  conference  was  over  the  Allied  premiers  approved  the  repara- 
tions figures  amounting  to  226,000  million  gold  marks,  payable  in 
42  years,  in  instalments  of  mk.  20OO  million  annually  for  the  first 
two  years,  mk.  3000  million  annually  for  the  next  three  years, 
mk,  4000  million  annually  for  the  three  following  years,  mk.  5000 
million  annually  in  1929,  1930  and  1931,  and  mk.  6000  million 
annually  from  1932  to  1962.  In  addition  Germany  was  to  pay 
for  42  years  an  annual  tax  of  12  per  cent  on  her  total  exports. 
Article  4  of  the  Reparations  Note  handed  to  Germany  prohibited 
the  German  federal,  state  or  municipal  authorities  from  borrowing 
money  abroad  without  the  approval  of  the  Reparations  Commis- 
sion. All  the  assets  and  revenues  of  the  empire  and  of  the  states 
was  to  be  applicable  to  insure  execution  of  the  arrangements.  The 
proceeds  of  the  German  customs  was  to  constitute  special  security. 

The  very  high  figure  which  was  then  agreed  upon  by  the 
British  and  French  premiers  cannot  be  justified  from  any  economic 
standpoint.  The  French  established  the  amount  not  because  they 
expected  the  Germans  to  pay  it  but  because  it  enabled  them  to 
postpone  for  a  little  longer  the  breaking  of  the  news  to  the  French 
public  that  it  was  impossible  for  Germany  to  take  over  the  burden 
of  taxes  from  the  French  people.    The  British  approved  this  high 


THE    GERMAN    INDEMNITY  595 

sum  not  because  they  expected  it  would  be  paid  but  in  order  to 
preserve  Allied  unity.  These  figures  have  a  touch  of  statistical 
metaphysics  about  them.     M.  Doumer  outdid  Jules  Verne. 

V.  German  Proposals 

In  their  counter  proposals  in  London  on  March  i,  1921,  the 
Germans  ofFered  to  pay  reparations  of  50,000  million  gold  marks, 
from  which  they  deducted  20,000  million  gold  marks  approxi- 
mately, covering  property  surrendered,  leaving  a  balance  due  the 
Allies  of  30,000  million  gold  marks. 

Toward  the  end  of  April,  192 1,  these  counter  proposals  were 
submitted  in  modified  form  in  a  note  to  President  Harding  for 
transmission  to  the  Allies.     The  summary  of  the  note  follows: 

Germany  fixed  her  total  liability  at  50,000  million  gold  marks, 
and  proposed  to  issue  an  international  loan,  the  proceeds  of  which 
were  to  be  put  at  the  disposal  of  the  Allies.  Germany  would 
pay  according  to  her  capacity,  in  labor  or  other  forms  of  wealth 
and  in  annual  instalm.ents  such  sums  as  were  not  covered  by  the 
international  loan.  Germany  further  agreed  to  permit  the  Allies 
to  benefit  from  her  economic  progress.  The  annual  payments 
would  therefore  be  of  varying  amounts  depending  upon  Germany's 
increasing  capacity  to  pay.  Regarding  the  reconstruction  of  the 
devastated  territories  as  the  most  urgent  need,  Germany  offered 
to  reconstruct  any  towns  or  villages  specified  or  to  cooperate  by 
supplying  labor  and  raw  materials.  As  an  evidence  of  good  faith 
Germany  agreed  to  place  at  the  disposal  of  the  Reparations  Com- 
mission 1000  million  gold  marks,  consisting  of  150  million  gold 
marks  in  foreign  bills  and  850  million  gold  marks  in  Treasury 
notes,  redeemable  within  three  months  in  foreign  exchange  or 
foreign  securities.  Subject  to  the  wishes  of  the  United  States 
and  of  the  Allies,  Germany  agreed  to  assume  the  Allied  obligations 
to  the  United  States.  As  security  for  the  credits  granted  her, 
Germany  agreed  to  pledge  her  public  revenues  and  properties.  As 
prerequisites  for  the  carrying  out  of  these  terms,  Germany  re- 
quested the  annulment  and  release  of  all  other  obligations  under 
the  Treaty  and  of  German  private  property  in  foreign  countries, 
the  discontinuance  of  the  system  of  penalties  and  the  elimination 
of  all  unproductive  expenditures  imposed  upon  her  by  the  Allies 
and  the  restoration  of  freedom  in  international  commerce. 


596        INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 

vf.  Final  Terms  Accepted  by  Germany 

On  May  lO,  1921,  the  German  Reichstag  by  a  fair  majority 
accepted  the  terms  of  the  proposals  submitted  by  Lloyd  George 
in  London  on  May  5,  1921.  These  final  proposals  were  based 
on  the  German  counter  proposals  as  a  minimum  and,  depending 
upon  the  recovery  of  Germany,  provided  for  increasing  payments 
which  might  exceed  the  terms  laid  down  in  Paris  at  the  end  of 
January,  192 1.  As  summarized  by  Lloyd  George  in  his  address 
to  the  House  of  Commons  on  May  5,  the  final  proposals  provided 
for  the  issue  of  3  series  of  bonds  which  were  respectively  a  first, 
second  and  third  lien.  The  first  bonds,  series  A,  amounted  to 
12,000  million  gold  marks,  to  be  delivered  by  July  I,  1 92 1,  bear- 
ing interest  at  the  rate  of  5  per  cent  per  annum  and  accumulating 
I  per  cent  as  a  sinking  fund.  The  second,  or  series  B  bonds, 
amounted  to  38,000  million  gold  marks,  to  be  delivered  by  No- 
vember I,  1921.  The  series  C  bonds,  estimated  at  82,000  million 
gold  marks,  were  to  be  delivered  by  November  i,  1921,  with  the 
important  reservation  that  the  Reparations  Commission  was  to 
attach  the  coupons  and  issue  these  bonds  only  as  and  when  it  was 
satisfied  that  the  payments  to  be  made  under  the  agreement  were 
adequate  to  provide  for  interest  and  sinking  fund.  The  Repara- 
tions Commission  was  to  decide  from  time  to  time  as  to  the  capacity 
of  Germany  to  pay  and  issue  additional  bonds  accordingly.  The 
total  amount  of  the  reparations  was  therefore  132,000  million  gold 
marks.  Six  per  cent  of  this  amount  payable  annually  would  be 
7,920  million  gold  marks.  A  fixed  sum  of  2,000  million  gold 
marks  was  to  be  paid  annually,  but  in  addition  a  variable  sum 
added  to  it  which  should  be  equal  to  26  per  cent  of  German 
exports.  Wliether  that  sum  will  be  higher  or  lower  than  the 
Paris  proposals  depends  upon  German  prosperity.  If  German 
exports  do  not  improve  these  annual  payments  will  be  consider- 
ably less  than  that  provided  under  the  Paris  proposals.  If  German 
exports  rise  to  pre-war  levels  this  sum  will  approximately  equal 
the  Paris  proposals.  If  Germany  prospers,  the  annual  sum  may 
exceed  that  provided  under  the  Paris  proposals.  At  bottom,  under 
the  new  scheme  Germany's  annual  liabilities  will  vary  according 
to  her  capacity  to  discharge  them. 

With  respect  to  the  interest  on  the  bonds,  under  the  Treaty 
Germany  was  debited  with  interest  at  5  per  cent  upon  the  whole 


THE    GERMAN    INDEMNITY  597 

debt.  But  under  the  terms  fixed  in  London  the  unissued  bonds, 
Series  C,  bore  no  interest.  Under  the  final  terms  25  per  cent 
of  the  exports  are  to  be  devoted  to  the  payment  of  interest  and 
amortization  on  the  bonds  issued.  Any  balance  remaining  plus 
an  additional  i  per  cent  on  the  exports  are  to  be  devoted  to  the 
payment  of  interest  upon  the  unissued  bonds.  Above  these  avail- 
able amounts  the  interest  will  not  be  debited  to  Germany  and 
will  not  accumulate  as  a  liability. 

The  London  agreement  further  resembles  the  German  counter 
proposals  of  March,  1921,  in  that  a  payment  of  lOOO  million  gold 
marks  is  stipulated,  payable  in  gold  or  3  months  foreign  bills  or 
Treasury  bills  endorsed  by  German  banks.  Furthermore,  Ger- 
many is  to  pay  in  kind — in  coal,  aniline  dyes  and  reconstruction 
material.  The  remaining  source  of  payments  is  a  duty  of  26  per 
cent  on  German  exports  collected  either  in  Germany  or  in  the 
country  importing  the  goods.  A  fund  of  foreign  bills  will  thus 
be  created. 

A  Committee  on  Guarantees,  operating  under  the  Reparations 
Commission,  will  sit  in  Berlin  for  the  purpose  of  supervising  the 
collection  of  the  26  per  cent.  Its  powers  will  be  restricted  to 
supervision  and  control  and  the  receipt  of  payment,  but  will  not 
authorize  interference  in  German  internal  administration.  The 
receipts  from  taxes  and  materials  in  kind  will  be  pledged  for  the 
payment  of  interest  and  amortization  on  the  bonds  issued.  Like 
the  German  counter  proposals  the  London  proposals  provide  for 
the  pledging  of  other  German  revenues  as  security  for  payment 
of  interest  on  the  bonds. 

The  final  terms  proposed  by  the  Allies  and  accepted  by  Ger- 
many are  lower  than  the  proposals  at  Paris;  the  minimum  terms 
are  approximately  equal  to  those  offered  by  Germany  itself.  The 
minimum  provisions  may  be  within  the  capacity  of  Germany  to 
pay.  The  elastic  provisions  providing  for  an  increase  in  payment 
depending  upon  German  recovery,  are  fair  both  to  Germany  and 
to  the  Allies,  particularly  since  the  unissued  bonds,  representing 
about  60  per  cent  of  the  maximum  amount  of  the  reparations, 
are  to  bear  no  interest  unless  the  export  tax  provides  the  funds. 
J.  M.  Keynes,  the  spokesman  for  a  just  treaty,  said  of  the  London 
terms,  that  "the  decision  of  the  Reparations  Commission  that 
Germany's  total  liability  under  the  Treaty  amounts  to  132,000 
million  gold  marks,  inclusive  of  the  sums  due  before  May  i,  1921, 


598        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

and  inclusive  also  of  Germany's  liability  for  the  Belgian  debt  to 
the  Allies,  is  a  signal  triumph  for  the  spirit  of  justice."  The 
provision  for  3  series  of  bonds,  w^hich  constitute  a  first,  second  and 
third  lien  add  to  the  negotiability  of  the  bonds  and  make  it  more 
possible  than  under  any  previous  indemnity  proposals  to  distribute 
the  bonds  to  the  private  investors  of  the  world. 

D.  Method  of  Payment 

i.  Surrender  of  Property 

The  estimates  of  property  surrendered  to  France  by  Germany 
were  given  in  a  German  report  on  the  execution  of  the  terms  of 
the  Treaty  of  Versailles,  submitted  to  the  Reparations  Commission. 
The  value  of  goods  delivered  by  Germany  under  the  reparations 
clauses  up  to  December  31,  1920,  amounted  to  21,176  million 
gold  marks.-  Section  A  included  the  merchant  marine,  valued  at 
7310  million  marks,  railway  equipment  at  mk.  1589  million,  and 
lesser  amounts  of  coal  and  coke,  animals,  dyes  and  agricultural 
machinery,  or  a  grand  total  of  10,307  million  gold  marks.  Sec- 
tion B  included  federal  and  state  property  valued  at  4482  million 
gold  marks,  German  property  left  in  the  invaded  territories  valued 
at  2498  million  gold  marks,  and  the  Saar  mines,  valued  at  1057 
million  gold  marks,  as  well  as  ocean  cables,  or  a  total  of  8 1 30 
million  gold  marks.  Section  C,  or  expenses  incurred  in  accordance 
with  Article  235  of  the  peace  treaty,  included  German  imports  of 
foodstuffs  and  raw  materials  judged  essential  by  the  Reparations 
Commission,  amounting  to  2250  million  gold  marks  and  expenses 
of  the  army  of  occupation  and  of  the  inter-Allied  commissions 
amounting  to  490  million  gold  marks. 

In  a  note  of  February  26,  192 1,  to  the  German  Government, 
the  Reparations  Commission  estimated  the  value  of  property  sur- 
rendered by  Germany  under  the  treaty  at  less  than  mk,  8000 
million,  in  contrast  to  the  German  estimate  of  mk.  21,176  million. 

ii.  Payment  in  Kind 

A  commission  of  German  engineers  was  allowed  by  the 
Supreme  Council  of  the  Peace  Conference  to  report  on  a  scheme 

*  Frankfurter  Zeitung,  Jan.  19,  1921. 


THE    GERMAN    INDEMNITY  599 

for  rebuilding  northern  France  with  German  materials,  German 
labor  and  under  German  superintendence.  In  view  of  the  diffi- 
culty of  payment  in  cash  German  negotiations  to  pay  in  kind  con- 
tinued throughout  1920.  This  method  was  advocated  in  France 
in  a  modified  form  by  M.  Seydoux  of  the  Ministry  of  Finance. 
French  firms  were  to  order  goods  from  Germany  and  pay  for 
them  in  certificates  issued  by  the  French  Reparation  Bureau  and 
paid  into  German  banks  authorized  by  the  German  government 
to  receive  them. 

Payment  in  kind  is  more  just.  The  disadvantage  that  has  been 
urged  against  it  was  that  from  the  French  point  of  view,  Ger- 
many would  not  pay  to  the  maximum  of  her  capacity  but  only  to 
the  extent  of  the  demands  for  reconstruction. 

However,  at  a  meeting  in  Paris  on  March  21,  192 1,  the 
Confederation  Generale  du  Travail  declared  itself  in  favor  of 
having  Germany  pay  in  kind.  In  view  of  the  shortage  of  French 
labor  and  the  inevitable  delay  in  repairing  the  damage,  the  delegates 
from  the  devastated  regions,  particularly,  favored  the  plans,  for 
they  wanted  their  homes  rebuilt,  they  cared  not  by  whom.  The 
plan  would  mitigate  the  fiscal  difficulties  of  France.  The  extra- 
ordinary budget  could  be  reduced  or  eliminated  and  France  would 
not  have  to  float  further  large  loans  for  reparation  purposes.  The 
basic  justice  of  the  plan,  the  concrete  application  of  international 
ethics,  vindicates  this  proposal  on  rational  and  moral  grounds. 
After  months  of  discussion,  M.  Louis  Loucheur,  the  French 
Minister  of  the  Liberated  Regions  and  Walther  Rathenau,  the 
German  Minister  of  Reconstruction,  reached  an  agreement  on  the 
question  of  payment  in  kind,  and  the  terms  were  signed  at  Wies- 
baden, October  6,  1921.  The  agreements  provided  the  methods 
whereby  Germany  shall  supply  materials  for  the  reconstruction  of 
the  devastated  areas  in  northern  France.  The  transactions  will  be 
consummated  between  organizations  created  by  the  French  and 
German  governments.  The  French  organization  will  centralize 
the  demands  of  all  the  people  of  the  devastated  districts  and  list 
the  nature  and  amounts  of  goods  required  for  reconstruction.  The 
French  organization  will  give  the  orders  and  the  German  organi- 
zation will  in  turn  distribute  them  among  the  German  manufac- 
turers and  dealers.  For  goods  received  the  inhabitants  of  the 
devastated  areas  will  pay  indemnity  warrants  or  monies  to  the 
French  organization,  which  in  turn  will  pay  in  bonds  or  otherwise 


6oO        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

to  the  German  organization.  The  latter  will  then  settle  with  the 
private  German  manufacturers  and  dealers.  Arbitration  on  ques- 
tions of  specifications,  deliveries,  prices  and  transportation  is  pro- 
vided for  by  means  of  a  commission,  one  member  of  which  is  ap- 
pointed by  the  President  of  the  Swiss  Federation,  France  will 
credit  Germany  to  the  extent  of  looo  million  gold  marks  per 
annum  against  the  part  of  the  reparations  payment  due  to  her. 
The  official  text  of  the  agreement  reads  as  follows: 

"Germany  engages  to  deliver  to  France  upon  her  demand 
all  machinery  and  materials  which  would  be  compatible  with 
the  possibilities  of  production  in  Germany  and  subject  to  her 
limitations  as  to  supplies  of  raw  materials.  Such  deliveries 
will  be  in  accord  with  the  requirements  necessary  for  Germany 
to  maintain  her  social  and  economic  life.  This  agreement 
shall  date  from  October  i,  1921. 

"In  any  case  the  present  contract  excludes  the  products 
which  it  is  specified  Germany  must  turn  over  to  the  Allies  in 
Annexes  3,  5  and  6,  Part  VIII  of  the  Treaty  of  Versailles 
(referring  to  deliveries  of  ships,  coal  and  dyes).  The  cumu- 
lative value  of  the  payments  in  kind  which  Germany  will 
supply  France  in  execution  of  Annexes  3,  5  and  6,  as  well  as 
deliveries  Germany  makes  to  France  under  the  present  con- 
tract, will  not  exceed  7,000,000,000  gold  marks  from  October 
I,  1921,  to  May  I,  1926. 

"It  is  expressly  stipulated  that  all  deliveries  shall  be  de- 
voted to  the  reconstruction  of  devastated  regions  in  Northern 
France." 

To  protect  the  interests  of  the  other  Allies,  Germany  will  never 
be  credited  with  a  sum  greater  than  France's  yearly  share  in  the 
reparations. 

The  advantages  of  the  plan  are  evident.  Although  cash  pay- 
ments by  Germany  would  be  preferable  to  goods  as  a  relief  to 
French  finances,  cash  promised  is  less  tangible  than  commodities 
delivered.  France  is  thus  assured  annual  reparations  payments. 
Furthermore,  France  is  able  to  reduce,  if  not  eliminate,  the  section 
of  the  budget,  "Recoverable  from  Germany  Under  the  Treaty 
cf  Peace,"  and  thus  enabled  to  stabilize  her  finances.  Again,  the 
inhabitants  of  the  devastated  regions  receive  prompt  aid  in  the 
rebuilding  of  their  homes.     Finally,  France  can  divert  material 


THE    GERMAN    INDEMNITY  6oi 

and  labor  from  the  rebuilding  of  Northern  France  to  reestablishing 
her  foreign  trade.  On  the  other  hand,  Germany  is  relieved  from 
the  need  of  finding  huge  amounts  of  foreign  bills,  from  straining 
her  industry  for  the  purpose  of  "dumping"  exports,  and  is  relieved 
from  military  threats  should  she  be  unable  to  accumulate  sufficient 
foreign  currencies.  The  parties  at  a  disadvantage  are  the  French 
contractors  who  would  profit  on  the  slow  rebuilding  of  Northern 
France ;  furthermore  the  other  Allies  might  receive  a  smaller  share 
of  the  reparations  payments  than  the  French. 

iii.  Negotiable  Bonds 

By  November  i,  1921,  and  under  the  terms  accepted,  Germany! 
handed  to  the  Reparation  Commission  negotiable  bonds  in  pay- 
ment of  the  indemnity.  Payment  in  such  a  form  was  necessary 
because  the  rebuilding  of  the  devastated  territory  could  not  be 
postponed  for  30  years,  when  the  last  instalment  would  have 
fallen  due.  Reconstruction  in  France  must  be  carried  on  promptly. 
The  plan  was  that  the  Entente  should  guarantee  the  German 
indemnity  bonds  which  could  then  be  negotiated  in  countries  sup- 
plying raw  materials.^  The  advantage  was  that  the  guarantor 
powers,  as  well  as  France,  would  have  an  interest  in  the  recovery 
of  Germany.  On  the  other  hand,  Professor  Gustav  Cassel  in 
his  memorandum  stated  that  unless  the  indemnity  was  fixed  at  a 
moderate  figure  and  that  unless  economic  freedom  was  granted  to 
Germany  the  discounting  of  indemnity  bonds  would  prove  an 
unworkable  proposal,  for  as  he  stated,  the  name  of  a  bankrupt 
does  not  strengthen  any  paper,  nor  would  anyone  wish  to  be  an 
executor  or  a  partner  of  a  bankrupt.® 

In  accordance  with  the  terms  of  Article  V  of  the  Allied  ultima- 
tum accepted  by  Germany  on  May  10,  192 1, 

"Germany  will  pay  within  twentj^-nve  days  of  this  notifi- 
cation 1,000,000,000  gold  marks  in  gold  or  approved  foreign 
bills  or  in  drafts  at  three  months  on  the  German  Treasury, 
endorsed  by  approved  German  banks  and  payable  in  London, 
Paris,    New   York    or    any   other    place    designated    by    the 

"Brussels  Financial  Conference,  Papers  No.  XII,  p.  80,  by  Andre 
Sayous:     Paper  No.  XIII,  p.  6,  Charles  Gide,  p.  45,  Gustav  Cassel. 

*  Jenny,  Frederic,  Comment  mobiiiser  la  dette  alleraande.  Revue 
Politique  et  Parliaraentaire,  May  lo,  1920,  pp.  170-180. 


6o2        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 

Reparations  Commission.  These  payments  will  be  treated 
as  the  first  quarterly  instalments  of  the  payments  provided  for 
in  compliance  with  Article  IV  ( I ) ." 

On  May  17,  1921,  Germany  turned  over  to  the  Reparations 
Commission  the  equivalent  of  150  million  gold  marks,  to  be  applied 
against  the  looo  million  due.  The  payment  consisted  of  gold  and 
the  currency  of  several  countries.  On  May  28,  1921,  the  German 
governm.ent  sent  to  the  Reparations  Commission  20  three-months 
Treasury  bills  of  lO  million  dollars  each  (equivalent  to  about  840 
million  gold  marks)  of  which  80  million  dollars  was  payable  in 
New  York,  60  million  dollars  in  London  and  60  million  dollars 
in  Paris.  The  bills  were  endorsed  by  the  large  German  banks. 
Originally  it  was  stipulated  that  the  Treasury  bills  should  be  in 
dollars,  but  the  conversion  into  dollars  of  the  several  currencies 
accumulated  by  Germany  caused  a  marked  depreciation  in  the 
European  exchanges.  As  a  result,  on  June  28,  1921,  the  Repara- 
tions Commission  decided  that  payment  might  be  made  in  European 
currencies  instead  of  dollars,  in  which  the  initial  payments  were 
made.    The  Commission  announced  its  decision  as  follows: 

"So  as  to  avoid  disturbance  of  the  exchange  market  the 
Commission  on  Reparations  has  given  permission  that  for  the 
month  of  June  and  as  a  trial,  payments  by  Germany  should 
no  longer  be  made  in  dollars,  but  in  European  currencies. 

"This  decision  has  been  made  possible  through  the  action 
of  certain  allied  powers,  which  have  consented  to  assume 
the  risks  of  exchange  with  respect  to  certain  different  curren- 
cies and  for  definite  amounts." 

Germany  effected  settlement  by  paying  silver,  gold  and  foreign 
bills,  the  latter  in  some  cases  secured  by  the  pledge  of 
silver.  The  government  accumulated  gold  by  offering  260  paper 
marks  for  every  20-mark  gold  piece.  The  first  shipment  of  silver 
from  Germany  was  received  in  New  York  by  the  Equitable  Trust 
Company  tovi^ard  the  end  of  July,  1921.  The  first  shipment  of 
gold  from  Germany  was  received  by  J.  P.  Morgan  and  Company 
toward  the  end  of  August,  1921.  Part  of  the  pajment  was  also 
in  the  form  of  American  paper  money,  spent  in  Germany  by  Amer- 
ican soldiers.  However,  the  main  part  of  the  fund  was  obtained 
by  Germany  through  the  sale  of  exchange,  or  the  purchase  of 


THE    GERMAN    INDEMNITY  603 

dollars.  The  operations  were  carried  on  in  New  York  by  the 
Equitable  Trust  Company,  Guaranty  Trust  Company,  Hallgarten 
and  Company,  and  Speyer  and  Company,  and  abroad  by  the  Roth- 
schilds and  the  London  branches  of  the  Equitable  Trust  Company 
and  of  J.  and  W.  Seligman  and  Company.  These  foreign  bills 
arose  in  part  from  credits  which  Germany  negotiated  in  Holland, 
Denmark,  Sweden,  Switzerland    the  United  States  and  England. 

E.  Criticism 

i.  Inability  to  Pay 

But  even  within  the  scope  of  the  treaty  there  are  •limitations 
on  Germany's  ability  to  pay.  The  treaty  provides  that  the  sums 
"for  reparation  that  Germany  is  required  to  pay  shall  become  a 
charge  upon  all  revenues  prior  to  that  for  service  or  discharge  of 
and  domestic  loan."^  Yet  there  is  a  difference  between  payment 
in  marks  on  internal  war  loans  and  payments  in  francs  on  account 
of  the  indemnity.  Marks  are  current  in  Germany  but  cannot 
be  used  for  payment  elsewhere,  unless  there  is  a  demand  for  marks 
to  pay  for  German  goods  or  services.  In  other  words,  the  maxi- 
mum sum.  that  Germany  can  pay  is  the  capitalized  value  of  a  series 
of  annual  payments  equal  to  her  excess  of  exports.  Keynes 
demonstrated  that  the  approximate  maximum  sum  that  Germany 
can  pay  is  35,000  million  gold  marks  if  she  is  allowed  to  develop 
an  adequate  excess  of  exports.  Under  conditions  in  1 921,  she  can 
reduce  her  imports  only  by  under-consumption.  As  for  the  Paris 
proposals  of  226,000  million  gold  marks,  Mr.  Keynes  estimates 
that  if  Germany  was  to  develop  an  excess  of  exports  sufficient  to 
pay  the  enormous  indemnity  instalments  amounting  to  6000  million 
gold  marks  per  annum  after  1932,  the  reaction  on  the  trade  and 
industry  of  the  world  would  be  incalculable.^ 

The  indemnity  payments  proposed  at  Paris  have  been  trans- 
lated in  terms  of  working  hours  by  Walter  Rathenau  of  the  Ger- 
man General  Electric  Company,  To  pay  6000  million  gold  marks 
annually  Germany  would  either  have  to  reduce  her  annual  con- 
sumption to  about  one-quarter  of  the  pre-war  level  or  extend  the 
working  time  for  industrial  laborers  from  8  to  14  hours  per  day, 

'Annex  II,  Art,  12,  paragraph  b. 
•Manchester  Guardian,  Jan.  31,  1921. 


6o4        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Neither  of  these  conditions  could  have  been  carried  out  over  the 
contemplated  period  of  30  years. 

Again,  the  indemnity  might  be  regarded  as  sums  collected 
from  the  individual  taxpayer  for  the  purposes  of  employing  labor 
in  the  manufacture  of  unpaid  exports.  To  raise  2000  million  gold 
marks  or  about  24,000  million  paper  marks  would  seem  rather 
difficult  in  view  of  the  fact  that  the  existing  deficit  is  over  70,000 
million  paper  marks.  According  to  Brailsford,  Germany  cannot 
under  the  existing  circumstances  pay  the  indemnity,  "even  if  the 
whole  population  dispensed  with  coffins  and  wore  no  grave  clothes." 

Since  the  indemnity  can  be  paid  only  by  means  of  an  excess 
of  exports,  the  Allies  should  foster  German  foreign  trade,  if  they 
mean  to  collect  their  claims.  To  obstruct  German  export  would 
curtail  or  extinguish  the  source  of  indemnity  payments.  Of  course 
the  German  papers  emphasized  this  aspect.  In  the  words  of  the 
German  Foreign  Minister,  Dr.  Simons,  "If  the  Allies  expect  an 
enormous  indemnity,  they  should  direct  the  German  exports  toward 
the  eastern  markets.  But  instead,  they  are  frustrating  German 
negotiations  with  the  eastern  states.  The  indemnity  problem  can 
be  solved  only  if,  instead  of  ideas  of  punishment,  the  ideas  of 
solidarity  are  placed  in  the  forefront."^ 

Can  Germany  pay  the  amounts  required  under  the  proposals 
finally  accepted?  To  meet  interest  and  amortization  charges  on 
50,000  million  gold  marks  Germany  will  have  to  pay  3000  million 
gold  marks  per  annum.  If  German  exports  in  1 92 1  are  4000 
million  gold  marks,  she  would  have  to  pay  the  fixed  sum  of  2000 
million  gold  marks,  plus  26  per  cent  of  the  total  exports.  This 
sum  would  equal  the  3000  million  gold  marks  required  to  pay 
interest  and  amortization.  The  interest  and  amortization  on  the 
entire  132,000  million  gold  marks  would  amount  to  7920  million 
gold  marks  per  annum  and  the  exports  necessary  to  produce  this 
sum  would  have  to  be  about  23,000  million  gold  marks.  In  other 
words,  to  meet  the  minimum  charges  Germany  would  have  to 
export  4000  million  gold  marks  per  annum.  To  meet  the  maxi- 
mum charges  Germany  would  have  to  export  23,000  million  gold 
marks. 

Undoubtedly,  Germany  cannot  meet  the  requirements  of  the 
maximum  reparations  payments.  In  order  to  pay  the  minimum  of 
3000  million  gold  marks  per  annum  Germany  would  have  to  have 

'Associated  Press  dispatch,  Stuttgart,  Feb.  13,  1921. 


THE    GERMAN    INDEMNITY  6oS 

exports  of  4000  millicn  gold  marks  and  imports  of  only  lOOO 
million  gold  marks.  For  whatever  the  fixed  sum  or  the  tax  rate 
may  be,  Germany  can  pay  only  in  foreign  bills  resulting  from  an 
excess  of  exports.  Whether  exports  can  equal  126  percent  of  im- 
ports plus  2000  million  gold  mk.  is  doubtful.  Before  the  war  Ger- 
many had  exports  of  about  10,000  million  gold  marks  and  an 
excess  of  imports  of  about  1500  million  gold  marks.  By  restrict- 
ing luxury  imports  and  luxury  consumption,  Germany  should  be 
able  to  pay  a  good  part  of  the  minimum  annual  payments  imposed. 
Whether  she  can  pay  it  all  depends  upon  a  great  many  political 
factors,  which  it  is  impossible  now  to  foresee.  A  spirit  of  modera- 
tion on  the  part  of  the  Allies  may  be  the  most  prudent  way  of 
advancing  their  own  interests. 


ii.  Inability  to  Receive  Payment 

It  is  difficult  not  only  for  Germany  to  pay  the  huge  indemnity 
but  also  for  the  other  countries  to  receive  it.  In  order  to  have 
an  excess  of  exports,  Germany  must  reduce  her  imports  and  lower 
her  standard  of  living  to  a  level  bordering  on  starvation.  Under 
such  conditions,  Germany  v/ould  be  able  to  underbid  the  manu- 
facturers in  other  countries,  in  which  a  higher  standard  prevailed. 
A  tariff  against  German  goods  might  protect  the  home  market. 
Consequentlj',  German  goods  would  be  driven  to  overseas  markets, 
and  the  export  trade  of  Great  Britain,  France,  and  the  other  Allies 
would  be  displaced  in  competition  with  sweated  German  labor. 
The  only  possible  condition  under  which  the  other  countries  could 
hope  to  meet  German  competition  would  be  by  a  corresponding 
reduction  in  the  standard  of  living.  British  and  French  labor 
would  have  to  pay  the  penalty,  if  the  German  indemnity  should  be 
made  possible,  not  only  because  Germany  would  have  to  reduce 
her  imports  and  thus  close  her  markets  to  foreign  goods,  but  also 
because  she  would  have  to  increase  her  exports  and  thus  either 
shut  off  the  export  products  of  British  and  French  labor  or  else 
drag  it  down  to  her  own  unlivable  level.^'* 

^"Brailsford,  H.  N.,  Indemnities  and  Unemployment,  New  Republic, 
Mar.  23,  1921. 

Dulles,  John  Foster,  The  Reparation  Problem,  ibid.,  March  30,  1921. 

Hobson,  J.  A.,  The  German  Indemnity;  A.  British  View,  The  Nation 
,(N.  Y.)  March  9,  1921. 


6o6        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

In  the  resolutions  adopted  at  a  meeting  of  the  Parliamentary 
Committee  of  the  Trades  Union  Congress  and  the  Executive  Com- 
mittee of  the  British  Labor  Party  on  February  17,  1921,  the  unem- 
ployment then  prevalent  in  Great  Britain  was  ascribed  to  the 
so-called  suicidal  foreign  policy.  "The  indemnity  terms  demand 
an  immense  tribute  from  German  industry  which  must  reduce 
the  capacity  of  the  German  population  to  consume  our  goods.  We 
shipped  directly  last  year  to  the  German,  Russian,  and  Austro- 
Hungarian  ports  less  than  one-tenth  of  what  we  sent  them  in  1913. 
That  decrease  alone  would  account  for  most  of  the  present  unem- 
ployment. The  indemnity  can  be  paid  only  in  exports  of  goods 
which  do  not  call  for  any  goods  in  return  by  way  of  payment. 
That  means  further  disturbance  of  British  industry.  Swamping 
the  world's  markets  with  what  are  virtually  prison-made  goods 
will  confront  British  workers  with  an  unprecedented  form  of 
competition." 

Two  years'  experience  after  the  signing  of  the  peace  treaty 
has  indicated  that  the  Allied  powers  do  not  wish  to  receive  goods 
from  Germany.  In  spite  of  the  fact  that  the  Allies  in  191 9  insisted 
upon  terms  in  the  treaty  which  would  give  them  all  the  ships 
that  Germany  owned  and  could  build,  the  Allied  reparation  experts 
recommended  in  192 1  that  Germany  cease  to  deliver  any  further 
tonnage  and  that  some  already  delivered  be  returned  to  Germany. 
As  for  coal  deliveries,  England  has  constantly  insisted  that  the 
German  coal  delivered  to  France  should  not  underbid  British  coal, 
and  thus  give  French  industry  an  advantage.  Upon  the  resumption 
of  operation  of  the  French  coal  mines,  France  will  probably  take 
the  same  attitude  toward  German  coal  deliveries  as  Great  Britain 
took  toward  German  shipping  deliveries.  Up  to  192 1  none  of  the 
Allies  had  exercised  the  option  under  the  Treaty  of  Peace  of 
accepting  machinery  from  Germany,  except  in  insignificant  quanti- 
ties. The  same  difficulty  applies  to  the  other  categories  specified 
in  the  treaty.  The  Allies  do  not  want  German  goods  gratis.  Nor 
is  any  other  power  likely  to  consent  to  be  a  party  to  a  triangular 
transaction,  whereby  Germany  may  pay  the  reparation  claims  of 
the  Allies. 

The  indemnity  must  be  reduced  not  only  to  the  amount  that 
Germany  is  able  to  pay,  but  also  to  the  amount  that  the  Allies 
are  willing  to  receive. 


THE    GEBMAN    INDEMNITY  607 

ill.  Cost  of  Reparation 

As  an  alternative  proposal  to  the  payment  of  a  definite  amount 
by  Germany,  France  could  consent  to  reduce  the  indemnity  to 
the  actual  cost  of  reparation;  that  is,  Germany  would  cease  to 
pay  any  indemnity  after  the  work  of  restoration  was  completed. 
An  official  French  statement  shows  that  up  to  the  end  of  1920 
about  78.5  per  cent  of  the  industries  in  the  devastated  area  were 
reconstructed,  as  well  as  60  per  cent  of  the  highways,  80  per  cent 
of  canal  and  water  ways,  and  practically  the  entire  railroad 
mileage.^^  The  amount  spent  for  reconstruction  was  less  than 
35,500  million  paper  francs,  approximately  equivalent  to  $2400 
million.  It  is  very  likely  that  $4000  million,  at  present  value, 
will  amply  cover  the  reconstructed  needs  of  France.  The  agree- 
ment to  have  indemnity  payments  cease  after  the  rehabilitation 
is  completed  will  do  much  to  restore  the  will  to  work  in  Germany, 
upon  which  the  economic  revival  of  France  and  of  all  Europe 
depends.  The  reporter  of  the  Finance  Committee  of  the  French 
Senate  estimated  on  April  10,  1921,  that  the  cost  of  reconstruction, 
yet  to  be  done  was  at  pre-war  valuation  about  26,000  million  gold 
francs. 

F.  Conclusion 

The  history  of  the  changes  in  the  successive  proposals  for  set- 
tling the  indemnity  shows  a  growing  spirit  of  moderation  and  a 
regard  for  the  realities  of  the  situation.  Under  the  original  terms 
specified  in  the  treaty,  provision  was  made  for  the  discharge  of  the 
entire  obligation  within  30  years  from  May,  1921,  and  the  amount 
fixed  was  far  beyond  Germany's  capacity  to  pay.  In  view  of  the 
indeterminate  amount  of  the  indemnity,  the  reparations  provisions 
of  the  treaty  failed  of  their  purpose  because  no  standard  of  capacity 
to  pay  was  specified,  and  the  German  people  had  neither  the 
incentive  nor  the  means  of  paying  such  indeterminate  amounts. 
The  German  government  was  then  invited  to  submit  such 
terms  as  seemed  reasonable  and  within  its  capacity.  However,  the 
discrepancy  between  the  German  offer  and  the  Allied  expecta- 
tions blocked  this  attempt  to  find  common  ground.     The  terms 

"Fortnightly  Survey  of  French  Economic  Conditions,  vol.  II,  Jan.  10, 
1921.    Pub.  by  French  Commission  in  New  York, 


6o8        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

agreed  upon  in  May,  1 92 1,  fixed  an  amount,  but  divided  it  into 
three  parts,  on  the  largest  of  which  the  interest  payments  were 
conditional  and  the  new  bonds  had  no  definite  maturity  date.  The 
terms  of  the  treaty  called  for  annual  payments  of  the  equivalent  of 
about  2000  million  dollars.  The  Allied  ultimatum  of  May,  1921, 
called  for  annual  payments  of  about  500  million  dollars,  plus  26 
per  cent  of  Germany's  exports.  But  the  May,  192 1,  program 
suffers  from  the  defect  that  the  greater  her  ability  to  pay  the 
greater  will  be  the  penalty  imposed,  and  as  Germany's  capacity 
to  pay  rises  the  burden  will  be  shared  by  the  United  States  and 
Great  Britain,  the  two  manufacturing  countries  who  compete  with 
Germany  in  foreign  markets.  The  history  of  the  reparations  terms 
indicates  that  a  further  moderation  is  to  be  expected  after  a  fair 
test,  in  which  Germany  continues  to  give  evidence  of  her  good 
faith.i2 

Germany  completed  the  payment  of  the  I  COO  million  gold 
marks  due  on  August  31,  192 1.  However,  in  spite  of  the  cynical 
gibe  at  Keynes  on  the  part  of  one  of  the  metropolitan  dailies,  Ger- 
many already  is  giving  evidence  of  the  tremendous  financial  strain. 
Perhaps  a  crash  will  follow  if  the  terms  in  the  Allied  ultimatum 
are  carried  out.  For  according  to  tentative  estimates,  based  on 
the  probable  volume  of  exports  of  Germany,  the  payments  for  the 
year  ending  August,  1922,  v/ill  aggregate  about  one  billion  dollars. 
Payments  up  to  the  end  of  August,  1 921,  were  made  through  the 
sale  of  marks,  through  bank  credits,  and  exports  of  silver  and  of 
gold.  In  all  responsible  quarters  there  is  an  attitude  of  watchful 
waiting  and  even  of  skepticism  as  to  Germany's  ability  to  continue 
payment.  Some  authorities  believe  that  default  is  inevitable  and 
that  the  reparation  terms  will  again  have  to  be  modified. 

Underlying  the  controversy  over  the  amount  of  the  indemnity 
is  the  fact  that  in  modern  wars  there  are  no  victors.  In  the 
World  War  even  the  victors  lost.  The  amount  of  the  indemnity 
must  conform  to  a  few  fundamental  principles.  The  burden  of 
France  must  be  lightened.  She  was  the  victim  of  ruthless  aggres- 
sion and  she  should  not  be  asked  to  share  the  reparations  payments 
with  countries  not  devastated.  The  treaty  provides  for  increasing 
the  taxation  in  Germany  to  the  level  obtaining  in  Allied  countries 

"  See  Cravath,  Paul  D.,  The  Reparation  Problem  and  Germanj-'s 
Acceptance  of  the  Allied  Ultimatum.  Issued  by  Equitable  Trust  Company 
of  New  York,  August,  1921. 


THE    GERMAN    INDEMNITY  609 

and  should  thus  achieve  this  aim.  France  must  be  convinced  of 
the  desirability  in  her  ow^n  interest  and  that  of  Europe,  of  not 
asking  indemnities  in  excess  of  the  actual  cost  of  rehabilitation. 
The  indemnity  w^as  increased  by  adding  the  cost  of  pensions  and 
allowances.^''^  By  admitting  this  item,  for  England  as  well  as  for 
France,  the  proportion  which  France  receives  of  the  total  indemnity 
was  decreased.  Her  claims  were  diluted.  In  the  general  economic 
interest  as  well  as  to  abide  by  the  terms  of  the  armistice,  France 
and  England  should  both  waive  claims  on  account  of  pensions 
and  allowances.  Of  the  remaining  portion  applicable  only  to 
the  repair  of  the  devastation,  France  would  receive  a  larger  share. 
If  the  Allies  abandon  the  proposal  of  fixing  the  indemnity  up  to 
the  maximum  of  the  capacity  of  Germany  to  pay,  they  are  no 
longer  put  to  the  need  of  fixing  a  sum  so  great  as  will  restrict 
the  recovery  of  Germany.  If  the  Allies  content  themselves  with 
fixing  the  indemnity  at  the  net  cost  of  repairing  the  damage  done, 
they  will  make  Europe  a  sounder  business  risk,  new  loans  will  be 
forthcoming,  and  the  recovery  of  Europe  hastened. 

"These  items  v^ere  added  in  distinct  violation  of  the  armistice  agree- 
ment, to  which  the  Allies  were  bound  by  the  signatures  of  their  representa- 
tives. To  the  credit  of  the  American  delegates  at  the  peace  conference, 
be  it  said,  they  protested  against  this  breach  of  a  treatj'  obligation  as 
flagrant  as  Germany's  disregard  in  1914  of  another  "scrap  of  paper."  See 
address  at  the  conference  by  John  Foster  Dulles,  reprinted  in  Appendix 
to  Baruch,  B.  M.,  The  Reparation  and  Economic  Sections  of  the  Treaty. 
N.  Y.  Harpers,  1920. 


CHAPTER  XVII 

THE  FOREIGN  EXCHANGES 

A.  The  Outlook 

The  war  influenced  profoundly  the  international  trade  balances 
of  most  of  the  countries  of  the  world.  Three  typical  cases  illus- 
trate the  varied  efiFects.  First,  the  countries  which  have  abandoned 
the  gold  standard  will  probably  repeat  historic  experience  in  inter- 
national trade  under  depreciated  paper.  Second,  because  of  the 
indemnity  payable  by  Germany,  her  foreign  exchange  outlook  is 
unique.  Third,  the  position  of  the  United  States  is  the  same  as 
that  of  any  of  the  older  countries  of  Europe  after  a  period  of  pro- 
longed lending,  with  this  distinction,  however,  that  the  change 
from  a  debtor  to  a  creditor  country  took  place  within  four  years 
or  less.  The  position  of  the  United  States  depends  of  course 
upon  the  payment  or  cancellation  of  the  loans  to  the  Allies. 

i.   The  United  States:  Effect  of  Investments  Abroad 

From  July  i,  1914,  to  December  31,  191 8,  the  excess  of  exports 
of  the  United  States  was  $11,524  million.  In  the  calendar  year 
19 19  it  was  $4016  million,  and  in  1920  it  was  $2949  million, 
making  a  total  excess  of  exports  for  the  6^  years  of  $18,489 
million.     This  huge  credit  was  offset  by  the  following  debits: 


Items 

Million  dollars 

Government  advances 

9500 
4000* 

2S00t 
2S00t 

Gold,  securities  returned,  freights,  immigrants'  remittances 
Private  loans 

Estimated  balance  or  open  credits 

♦Estimates  of  Bullock,  Williams   and  Tucker,   in  the   Harvard  Re- 
view of  Economic  Statistics,  ibid. 

fEstimates  of  Bullock,   et  al.,   1600  million  up  to  Dec.  31,   1918,  and 
Journal  of  Commerce  record  of  the  loan  flotations  after  the  armistice. 

X  Estimate  of  B.  M.  Anderson,  Jr.,  is  3500  million  dollars. 

610 


THE  FOREIGN  EXCHANGES  6ll 

According  to  Bullock  and  his  associates  the  pre-war  net  annual 
debit  of  the  United  States  was  $i6o  million  and  at  the  end  of 
1 91 8  the  net  annual  credit  balance  of  the  United  States  was  $525 
million.  Since  then  government  loans  of  about  $2400  million 
were  advanced  and  foreign  loans  of  about  $750  million  were  sold 
to  the  public.  Assuming  an  average  rate  of  interest  of  5  per  cent 
the  annual  credit  balance  as  of  December  31,  1920,  should  be 
about  $675  million.  However,  the  deferment  of  the  interest  on 
government  advances  will  cause  a  reduction  of  about  $450  million 
annually. 

In  view  of  the  breakdown  of  the  credit  of  the  European  coun- 
tries this  annual  credit  balance  of  the  United  States  will  not  be 
ofifset  by  imports  into  the  United  States.  Temporarily,  therefore, 
until  Europe  is  restored,  the  United  States  must  continue  to  lend. 
At  the  time  they  are  made  loans  constitute  a  debit  of  the  United 
States,  whose  effect  is  to  reduce  the  annual  credit  balance.  Ulti- 
mately the  interest  on  these  additional  loans  increases  this  balance. 
Interest  on  government  loans  must  be  deferred  temporarily  at  least. 
Partly  because  of  the  necessary  excess  of  imports  into  the  coun- 
tries of  Europe,  their  exchanges  are  depreciated  and  thus  constitute 
a  barrier  which  makes  it  impossible  for  them  to  furnish  dollars  in 
payment  of  interest  on  United  States  government  loans.  The 
United  States  Treasury  has  no  need  for  the  foreign  currencies 
in  the  United  States  and  would  not  be  warranted  in  accumulating 
large  idle  foreign  balances.  If  the  Treasury  did  not  defer  the 
collection  of  interest,  the  resultant  financial  difficulties  of  Europe 
would  check  the  necessary  purchases  in  the  United  States. 

However,  ultimately  Europe  will  have  to  pay  in  goods, 
although  probably  a  larger  part  of  our  annual  debits  than  before 
the  war  will  consist  of  increased  tourist  expenditures  and  further 
investments.  Unless  the  debts  of  the  Allies  are  canceled  there 
should  be  a  reversal  of  the  trade  balance  of  the  United  States. 
This  appears  to  have  been  foreshadowed  by  the  trade  changes  in 
1920.  Although  our  exports  increased  from  $7920  million  in  19 19 
to  $8228  million  in  1 920,  our  imports  increased  to  a  greater  extent, 
from  $3904  million  in  1919  to  $5279  million  in  1920.  Our  excess 
of  exports  declined  from  $4016  million  in  1919  to  $2949  million  in 
in  1920,  the  lowest  fig»ire  since  the  year  19 16. 

If  Europe  resumes  specie  payments  the  theory  of  international 
trade  would  call  for  a  flow  of  gold  from  countries  indebted  to 


6l2        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  United  States.  The  importation  of  gold  into  the  United 
States  would  result  in  rising  prices,  increased  imports,  and  decreased 
exports.  These  relations  will  probably  obtain  in  the  trade  between 
Great  Britain  and  the  United  States  sooner  than  in  the  case  of 
the  countries  on  the  Continent. 

ii.   Germany:     The  Effect  oj  the  Indemnity^ 

The  payment  of  the  indemnity  by  Germany  will  create  a 
demand  in  Germany  for  bills  on  London,  Paris,  New  York,  and 
other  centers,  with  which  to  pay  France.  Marks  will  therefore 
depreciate.  The  price  of  foreign  exchange  in  Germany  will  rise 
tnore  than  the  price  of  commodities.  The  abnormal  deviation  of 
the  exchanges  will  create  a  gap  which  will  stimulate  exports  and 
check  imports.  Under  the  inconvertible  paper  regime  the  exchange 
fluctuations  will  be  wide,  and  will  be  corrected  by  the  movement 
of  goods.  Ultimately,  as  exports  increase  and  imports  decrease, 
the  gap  between  the  foreign  exchange  rates  and  the  price  of  com- 
modities will  gradually  disappear. 

Germany  will  be  able  to  pay  in  goods  only.  Even  though  she 
pays  with  securities  or  with  mortgages  on  her  plant  and  equipment, 
the  annual  incom.e  due  to  the  foreigner  can  be  paid  only  in  goods 
exported.  In  fact  the  total  indemnity  is  nothing  other  than  the 
capitalized  value  for  a  series  of  years  of  the  annual  excess  of 
exports  from  Germany.  The  shipment  to  France  of  German 
goods  in  payment  of  reparation  claims  has  the  same  efiEect  as  if 
German  labor  bodily  migrated  to  France  to  do  the  reconstruction 
work.  If  Germany  pays  by  means  of  exports,  French  labor  can 
turn  to  reparation  work.  The  result  of  these  operations  will  be 
that  Germany  will  ultimately  develop  an  enormous  export  trade. 
If  she  does  so  the  countries  receiving  the  payments  will  be  unable 
to  do  likewise  during  this  period.  For  reasons  which  will  be 
explained  below,  the  gap  between  the  gold  prices  of  German 
exchange  and  of  commodities  will  make  of  Germany  a  country 
of  low  costs  and  of  hard  work,  and  without  luxur}-  expenditures. 

*  Taussig,  F.  W.,  Germany's  Reparation  Payment,  American  Economic 
Review  Supplement,  X:i,  pp.  33-49,  March,  1920,  and  discussion  b}-  John 
H.  Williams,  pp.  50-57.  Smith,  J.  Russell,  The  American  Trade  Balance 
and  Probable  Tendencies,  Annals  of  the  Am.  Acad.  Pol.  and  Soc.  Sci., 
Vol.  83,  May,  1919. 


THE   FOREIGN  EXCHANGES  613 

Countries  whose  exchange  is  not  abnormally  depressed  like  Ger- 
many's will  be  unable  to  compete  with  Germany  in  neutral  markets. 
The  effect  will  be  a  lowering  of  the  world's  price  level  as  the 
result  of  international  competition.  The  receipt  of  indemnity 
payments  will  lead  to  speculation  and  other  financial  disturbances 
in  the  indemnity-receiving  countries,  as  was  the  case  in  Germany 
in  the  70's.  Even  though,  as  J.  Russell  Smith  suggests,  the 
indemnity  payments  are  arranged  to  decline  gradually,  at  the  end 
of  the  period  of  indemnity  payments  Germany  will  have  a  large 
export  trade  and  the  industrial  facilities  for  its  successful  main- 
tenance. On  the  other  hand  the  country  receiving  the  indemnity 
will  have  relatively  small  exports  and  large  imports.  If  England 
and  France  do  not  wish  to  create  this  condition,  they  can  avoid 
it,  as  Professor  Taussig  points  out,  only  by  not  selling  the  repara- 
tion bonds.  Once  they  are  sold,  the  result  is  inevitable  unless 
Germany  defaults  on  the  interest  or  principal. 

The  fact  that  the  indemnity  payments  will  necessarily  increase 
Germany's  exports  may  be  the  explanation  for  the  imposition  of 
the  26-per  cent  export  tax  imposed  by  the  Allied  premiers  in  Lon- 
don in  the  ultimatum  of  May,  1 92 1.  However,  to  demand  in- 
demnity payments  in  gold  and  then  to  tax  Germany's  exports  is 
analogous  to  putting  a  machine  into  high  speed  and  simultaneously 
throwing  on  the  emergency  brake. 

iil.  International    Trade    Under   Depreciated   Paper^ 

In  the  section  on  the  theory  of  foreign  exchange  it  was  pointed 
out  that  in  countries  on  a  gold  basis  or  with  a  gold  exchange 
standard,  fluctuations  of  exchange  rates  are  within  narrow  limits. 
In  countries  on  an  inconvertible  paper  basis,  and  if  gold  moves 
freely,  fluctuations  are  wider.  The  fluctuations  are  widest  of  all, 
if  there  is  an  embargo  on  the  exportation  of  gold,  for  in  this  case, 
exchanges  are  corrected  only  by  the  movement  of  commodities 
which  are  less  sensitive  to  exchange  fluctuations  than  the  move- 
ment of  gold. 

The  trade  changes  in  paper  money  countries  were  illustrated 

^Williams,  John  H.,  Foreign  Exchange  Prices  and  the  Course  of 
International  Trade,  Annals  Am.  Soc.  Pol.  Sci.,  No.  178,  pp.  207-210, 
May,  1920.  Same  author,  Argentine  International  Trade  Under  Incon- 
vertible Paper.  Cambridge:  Harvard  University  Press,  1920,  pp.  17-20, 
154-155  and  253. 


6l4        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

in  the  Argentine,  and  more  recently  in  Germany,  as  explained  in 
the  section  on  German  exchange.  The  essential  fact  is  not  that 
foreign  exchange  rates  and  the  gold  premium  move  in  sympathy 
and  that  both  move  more  rapidly  than  the  general  price  level, 
but  that  the  depreciation  of  exchange  causes  a  rise  in  prices  of 
imported  goods  or  creates  a  gap  between  the  international  price 
level  and  the  local  cost  of  production.  The  international  price 
level,  which  determines  the  price  in  depreciated  currency  of  export 
commodities,  corresponds  to  the  premium  on  gold  and  rises  almost 
as  rapidly  as  foreign  exchange  depreciates.  However,  the  elements 
in  the  cost  of  production,  such  as  wages,  rent  and  overhead,  are 
not  so  sensitive  and  do  not  rise  so  rapidly.  Therefore  as  foreign 
exchange  depreciates  the  profits  in  export  industries  increase.  Ulti- 
mately the  cost  of  production  rises,  owing  to  the  Increase  In  the 
cost  of  living  resulting  from  increased  paper  prices  of  imported 
essential  goods. 

The  price  changes  in  a  country  on  a  paper  basis  are  exactly 
the  reverse  of  those  in  a  country  on  a  gold  basis.  In  a  country  on 
a  gold  basis,  a  rise  in  the  rate  of  foreign  exchange  results  in  the 
exportation  of  gold  and  in  a  lowered  price  level.  Exports  are 
thus  stimulated.  In  a  country  on  a  paper  basis  a  rise  of  foreign 
exchange  results  in  an  Increased  price  for  gold,  a  depreciation 
of  paper  and  a  rise  in  the  price  level.  But  a  rise  in  paper  prices 
stimulates  exports.  In  both  a  gold  and  a  paper  country  the  out- 
flow of  gold  lowers  the  gold  price  level.  In  the  paper  country 
paper  prices  rise.  Similar  causes  produce  apparently  opposite  price 
phenomena  and  similar  trade  effects. 

B.  Correctives 

i.  Infeasible  Proposals 

Many  proposals  for  rectifying  the  depreciated  exchanges  are 
based  on  the  assumption  that  depreciated  exchange  is  a  cause 
rather  than  an  Indicator  of  unsound  conditions.  Many  unwork- 
able proposals  have  been  put  forward.  To  level  all  the  differences 
in  the  exchanges  of  the  countries  of  the  world  would  require  an 
equalization  of  the  fiscal  and  financial  conditions  of  the  nations. 
Exchange  rates  Indicate  the  relative  ratios  of  gold  to  note  and 
deposit  liabilities,  tht  relative  foreign  floating  debt,   the  relative 


THE  FOREIGN  EXCHANGES  615 

trade  balance,  and  the  prospects  of  a  return  to  financial  health.^ 
"Pegging,"  or  the  continuous  funding  of  an  excess  of  imports  of 
a  country  whose  exchange  is  depreciated,  is  possible  only  if  the 
exporting  country  is  able  and  willing  to  extend  credit. 

The  "pegging"  of  the  exchanges  of  all  countries  by  means  of 
an  international  clearing  house  is  impossible.  Sr.  Luigi  Luzatti, 
the  Italian  economist  and  former  premier,  advocated  in  1907  and 
191 6  an  international  clearing  house  for  foreign  exchanges  in 
which  trade  balances  between  nations  would  be  adjusted  on  the 
same  principle  as  in  a  clearing  house  for  commercial  bankers. 
Settlement  would  be  effected  by  means  of  loans  issued  and  guar- 
anteed in  common.*  To  equalize  the  exchanges  would  involve  the 
transferring  of  the  burdens  from  the  weak  countries  to  the  strong 
ones. 

An  equally  impracticable  suggestion  is  to  establish  a  moratorium 
of  the  exchanges,  for  the  purpose  of  stabilizing  them,  and  thus 
facilitating  the  purchasing  of  goods  by  European  countries.^  A 
moratorium  would  merely  disguise  the  effects  of  the  disturbing 
financial  and  fiscal  factors,  which  cause  inequalities  in  exchange 
rates;  to  the  extent  that  this  disguise  hides  the  basic  evil  a  mora- 
torium would  do  harm  rather  than  good.  Besides,  at  what  level 
would  stabilization  be  effected? 

The  depreciation  of  exchange  resulted  in  heavy  exports  into 
Sweden,  Switzerland  and  the  United  States  from  the  countries 
whose  exchange  was  depreciated.  In  the  three  countries,  as 
explained  in  the  section  on  foreign  exchange,  merchants'  associa- 
tions recommended  tariff  increases  to  compensate  for  the  deprecia- 
tion of  the  exchanges.  In  other  words,  the  self-corrective  effect  of 
a  depreciated  exchange  would  according  to  these  recommendations, 
be  checked.  Automatically,  the  cost  of  production  would  normally 
rise  and  thus  offset  the  depreciation  of  exchange  and  the  advantage 
to  the  exporter  would  disappear. 

ii.  Financial  Correctives 

The  foreign  exchanges  may  be  corrected  by  the  cessation  of 
inflation   and   the  balancing  of  the  budgets.     These   factors  are 

•Report  of  the  Secretary  of  the  Treasury  for  1919,  p.  13,  et  seq. 

*Rome  dispatch,  Aug.  7,  1920. 

*  Gardin,  John  E.,  Chairman  of  the  International  Banking  Corpora- 
tion, in  an  address  to  the  American  Institute  of  Banking,  New  YorC 
Times,  Nov.  21,  1920. 


6l6        INTERNATIONAL    FINANCE    AND    ITS    REORGAJJIZATION 

interrelated.  The  inability  to  balance  the  budget  made  govern- 
ments resort  to  increased  issues  of  paper  money.  Under  a  regime 
of  inconvertible  paper  the  domestic  depreciation  of  paper  in  terms 
of  gold  has  its  analogue  in  a  depreciation  of  exchange  rates.  When 
inflation  is  stopped,  it  may  be  possible  partly  to  stabilize  the 
exchange  at  some  low  level.  This  course  should  ultimately  lead 
to  the  introduction  of  a  gold-exchange  standard  in  countries  with 
greatly  inflated  circulation.  In  countries  in  which  paper  is  at  a 
slight  discount,  the  cessation  of  inflation  should  ultimately  lead 
to  a  return  to  gold  parity.  A  large  foreign  floating  debt  or  a  large 
foreign  floating  supply  of  paper  money  depresses  the  exchange  rate 
of  a  country.  The  funding  of  the  floating  debt  and  the  conversion 
of  the  foreign-owned  currency  into  a  term  debt  will  release  the 
pressure  on  the  exchange  market  during  periods  of  slight  improve^ 
ment  in  exchange  rates.  An  increase  in  the  discount  rate  of  the 
central  bank  of  issue  is  a  prerequisite  in  checking  inflation. 

iii.   Trade  Correctives 

The  countries  with  depreciated  exchange  rates  must  al^o  apply 
the  trade  correctives.  Imports  must  be  reduced  to  the  minimum. 
Although  depreciated  exchange  tends  automatically  to  produce  this 
result,  it  does  so  indiscriminately.  The  importation  of  luxuries 
by  the  wealthy  depresses  the  exchange  rates  and  thus  raises  the 
price  of  imported  wheat  to  the  masses.  The  prohibition  of  luxury 
imports  or  the  application  of  priorities  makes  possible  a  finer  adjust- 
ment, less  burdensome  to  the  masses,  who  must  pay  for  imported 
necessities. 

The  exportation  of  gold  to  correct  the  exchanges  is  not  feasible 
during  a  period  of  depreciating  exchange.  Only  after  exchange  is 
somewhat  stabilized  is  the  exportation  of  gold  free  from  the  risk 
of  exhausting  the  gold  reserves  of  the  central  bank  of  issue. 

Exchange  rates  may  be  corrected  by  the  sale  of  foreign  securi- 
ties by  holders  in  countries  with  depreciated  exchange  rates.  How- 
ever, most  of  the  countries  with  greatly  depreciated  exchange  rates 
have  no  supply  of  foreign  securities  to  liquidate.  Such  as  there 
were  have  largely  been  sold  during  the  crisis.  As  an  alternative 
course  to  selling  of  securities  these  countries  may  raise  foreign 
loans.  However,  the  prerequisites  for  the  floating  of  foreign  loans 
are  the  restoration  of  a  balanced  budget,  the  cessation  of  inflation, 
and  the  checking  of  non-essential  imports. 


CHAPTER  XVIII 

THE  BRUSSELS  FINANCIAL  CONFERENCE  ^ 

The  financial  chaos  in  Europe,  whose  causes  have  been  traced 
in  the  preceding  chapters,  were  discussed  at  the  International  Fi- 
nancial Conference  at  Brussels.  This  body  made  its  own  diagnosis 
and  formulated  recommendations  for  both  national  and  interna- 
tional application,  to  restore  economic  stability  in  Europe. 

A.  The  Aim 

According  to  a  memorandum  published  in  the  United  States 
on  January  15,  1920,  signed  by  several  scores  of  bankers  and 
publicists  of  various  countries  of  the  world,  the  aim  of  the  Con- 
ference was  to  consider  what  action  might  be  taken  to  aid  in  the 
restoration  of  normal  economic  conditions.  It  was  originally  called 
for  some  time  in  May,  was  postponed  to  July  and  then  to  Septem- 
ber, and  finally  met  from  September  24  to  October  8,  1920."  Its 
aim  was  formulated  in  a  resolution  passed  by  the  Council  of  the 
League  of  Nations  in  February,  1 920,  to  the  effect  that  "the 
League  of  Nations  shall  convene  an  international  conference  with 
a  view  to  studying  the  international  crisis  and  looking  to  the  means 
of  remedying  and  of  mitigating  the  dangerous  consequences  arising 
from  it."  But  under  instruction  of  the  Council  of  the  League  of 
August  5,  1920,  "none  of  the  questions  which  are  the  subject  of 

^RaflFalovich,  Arthur,  Les  Enseignments  des  Conferences  Interna- 
tionales dcs  Londres  et  de  Bruxelles.  Discussions  de  la  Societe  d'Economie 
Politique,  Economiste  Francais,  Jan.  22,  1921,  p.  103. 

Jenny,  Frederic,  La  Conference  financiere  de  Bruxelles,  Revue  Poli- 
tique et  Parlementaire,  October  10,  1920,  pp.  53-68. 

A  Summary  Report  of  the  Conference,  Boston,  World  Peace  Founda- 
tion, 1920.  Siepmann,  II.  E.,  The  Brussels  Conference,  Economic  Journal, 
XXX:i2o,  pp.  436-460,  December,  1920.  Berridge,  S.,  Harvard  Review  of 
Economic  Statistics,  December,  1920,  pp.  349-359. 

^Annual  Report  of  the  Secretary  of  the  Treasury,  1920,  pp.  84-86, 
Report  and  Resolutions  of  the  International  Financial  Conference,  Brus- 
sels,  1920.     London:    Hodder  &  Stoughton,   1920. 

617 


6l8        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  present  negotiations  between  the  Allies  and  Germany  should 
be  discussed  at  the  Conference." 

Stated  in  greater  detail  by  the  Advisory  Committee  of  the  Con- 
ference, its  purpose  was  ( i )  to  obtain  as  complete  a  picture  as 
possible  of  the  situation  of  the  world  and  by  comparison  of  the 
situation  in  the  various  countries  to  make  it  possible  to  form  a 
judgment  as  to  the  importance  and  difficulty  of  the  problems  with 
which  they  respectively  are  faced;  (2)  by  an  interchange  of 
opinions  and  experience  to  assist  each  country  to  arrive  at  the 
soundest  possible  policy  for  dealing  with  the  difficulties  revealed  in 
the  survey  and  to  insure  that  such  national  policies  are  not 
antagonistic;  (3)  to  discuss  and  formulate  schemes  to  meet  those 
difficulties  where  national  action  needs  to  be  supplemented  by 
international  agreement. 

B.  The  Diagnosis 

The  published  report  of  the  Conference  gives  the  following 
review  of  the  situation.  Some  of  the  financial  difficulties  of  the 
world  are  common  to  all  nations,  but  the  degree  and  the  effects  of 
the  disturbances  have  varied,  depending  upon  the  extent  of  the 
participation  in  or  influence  of  the  war  and  the  methods  of  its 
financing.  The  total  internal  debt  of  the  European  belligerents 
is  equivalent  to  about  $155,000  million,  compared  with  about  $17,- 
000  million  in  1913.  The  government  expenditures  of  the  bel- 
ligerents has  increased  greatly,  as  high  as  1500  per  cent,  and  the 
annual  expenditures  are  estimated  at  20  to  40  per  cent  of  the 
national  income.  In  all  cases  except  that  of  Great  Britain,  the 
budget  has  a  large  deficit.  The  belligerents  reduced  their  pre- 
war holdings  of  gold  and  increased  their  paper  currencies.  The 
excess  of  imports  greatly  increased  during  the  war  and  even  after 
the  armistice.  Only  during  the  latter  part  of  1920  has  this  con- 
dition been  checked  or  reversed.  Upon  the  release  of  the  artificial 
support  of  the  exchanges  of  the  belligerent  countries  their  rates 
depreciated  very  rapidly.  As  a  result  of  the  war  new  states  have 
been  created  and  others  have  had  their  territories  profoundly 
modified.  The  fiscal  machinery  is  in  most  cases  not  yet  adjusted 
to  the  new  conditions,  and  enormous  expenditures  are  made  upon 
armaments  and  even  war,  and  upon  subsidies  for  food  and  for  the 
cost  of  living. 


THE  BRUSSELS  FINANCIAL  CONFERENCE  619 

Even  the  neutral  countries  of  Europe  have  been  affected.  The 
war  caused  heavy  expenditures  and  great  increase  in  their  debt. 
Their  budget  expenditures  have  been  increased  by  subsidies  to  the 
masses  to  reduce  the  cost  of  living.  As  a  result  of  the  belligerent 
demands  for  neutral  goods  and  the  embargo  on  imports  to  neutral 
countries,  they  accumulated  large  holdings  of  gold  which  resulted 
in  the  expansion  of  the  currency  and  a  rise  in  prices.  Their 
exchanges  rose  above  par  during  the  war.  After  the  armistice  the 
replenishing  of  their  stocks  reversed  the  trade  currents  and  resulted 
in  the  depreciation  of  their  exchanges. 

The  non-European  countries  have  been  least  affected.  Never- 
theless, their  economic  future  depends  upon  the  restoration  of  the 
purchasing  power  of  their  European  customers.  Again,  the  younger 
countries  lack  capital  for  the  development  of  their  resources  and 
compete  with  Europe,  which  needs  funds  for  the  repair  of  the 
ravages  of  war. 

Some  economic  difficulties  are  common  to  all  the  countries  of 
the  world.  The  cost  of  living  has  increased,  either  because  of 
the  abandonment  of  the  gold  standard  or  because  of  the  accumula- 
tion of  excessive  gold.  International  trade  has  been  restricted 
and  diverted  from  its  normal  channels.  The  inability  of  Europe 
to  supply  the  overseas  countries  during  the  war  resulted  In  the 
development  of  new  industries  and  the  search  for  new  sources  of 
supply.  On  the  other  hand  in  order  to  obtain  the  necessary  imports 
during  the  war,  Europe  liquidated  her  holdings  of  foreign  invest- 
ments. The  resulting  instability  of  the  exchanges  dislocated  trade. 
In  addition,  legislative  restrictions  on  trade  have  been  imposed 
during  and  since  the  war.  Credits  between  seller  and  buyer  are 
curtailed  by  the  very  causes  which  make  them  necessary. 

Viewing  the  problem  primarily  from  the  point  of  view  of 
production,  the  war  and  the  subsequent  political  disturbances  and 
military  expeditions  have  reduced  the  productivity  of  Europe,  and 
prevented  the  accumulation  of  a  social  surplus  and  the  increase 
of  capital  goods.  Through  death,  wounds  and  disease,  war  reduced 
the  total  productive  capacity  of  labor  and  its  output  was  further 
reduced  by  political  and  social  disturbances.  Similar  effects  were 
produced  by  new  national  boundaries,  new  trade  barriers,  new 
currency  units,  and  new  governments.  Production  decreased  as  a 
result  of  the  instability  of  exchange  rates  and  prices,  arising  from 
unbalanced  budgets  and  excessive  note  issues. 


620        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 


C.  Memoranda  Submitted  by  Economists 

In  accordance  with  the  alms  enunciated  above,  several  promi- 
nent economists  of  Europe  were  invited  to  present  their  views. 
They  submitted  independently  papers  which  treated  both  the 
diagnosis  and  the  remedies.  Their  joint  statement  is  given  here- 
with in  full: 

I.  Inflation 

1.  It  is  essential  that  the  inflation  of  credit  and  currency  should 
be  stopped  everywhere  at  the  earliest  possible  moment. 

2.  To  this  end,  Government  spending  must  be  cut  down,  the 
conduct  of  Government  enterprise  at  less  than  cost  and  the  pay- 
ment of  subsidies  on  particular  commodities  and  services  must  as 
far  as  possible  be  abolished,  and  military  and  naval  expenditure 
stringently  restricted. 

3.  The  equilibrium  of  state  budgets  must  be  restored,  loans  not 
being  employed  to  meet  ordinary  current  requirements. 

4.  Artificially  low  bank  rates  out  of  conformity  with  the  real 
scarcity  of  capital,  and  made  possible  only  by  the  creation  of  new 
currency,  must  be  avoided. 

5.  Floating  debts  should,  as  soon  as  practicable,  be  funded. 

II.  Exchanges 

6.  The  level  of  the  exchanges  tends  to  correspond  with  the 
relative  internal  values  of  the  currencies  of  the  several  countries. 
The  serious  depression  of  certain  exchanges  beneath  their  real  pari- 
ties would  be  ameliorated  by:  (a)  The  funding  of  floating  debts 
held  abroad  in  the  form  of  notes;  (b)  the  restoration  as  soon  and 
as  far  as  practicable  of  normal  trade  intercourse  between  the  dif- 
ferent countries. 

III.  International  Credits 

7.  The  grant  of  credit  (whether  through  an  international  loan 
or  system  of  guarantees  to  private  lenders  or  otherwise)  to  dis- 
tressed countries  must  naturally  be  conditional  upon  some  prioritj' 
being  given  to  those  credits  and  upon  other  claims  being  postponed 
till  those  credits  have  had  time  to  exercise  their  influence  upon 
production. 

8.  The  grant  of  credits  should  be  conditional:  (a)  Upon  their 
being  used  only  for  the  most  immediately  remunerative  purposes, 
including  the  provision  of  means  of  subsistence  for  the  laboring 
population,  and  (b)  upon  the  borrowing  countries  doing  ever}^hing 
in  their  power  to  cooperate  in  the  work  of  restoring  economic  life. 

9.  The  capacity  of  the  lending  world  to  grant  credits  will  depend, 
in  great  measure,  upon  the  restoration  of  real  peace  and  normal 
conditions  of  international  trade. 

(Signed)     G.  Bruins 

Gustave  Cassel 
Charles  Gide 
M.   Pantaleoni 
A.  C.  Pigou 


THE  BRUSSELS  FINANCIAL  CONFERENCE  621 

In  the  light  of  the  recommendations  of  these  economists  and 
of  the  resolutions  of  the  Conference,  subsequently  to  be  discussed, 
many  proposals  put  forward  during  the  war  and  after  the  armistice 
were  regarded  as  either  infeasible  or  premature.  The  proposal  for 
the  creation  of  an  international  currency,  the  demonetization  of 
gold,  the  revaluation  of  gold  and  the  payment  of  gold  miners' 
subsidies,  the  establishment  of  new  parities,  the  creation  of  an  inter- 
national gold  clearance  fund  or  of  an  international  reserve  bank, 
and  the  funding  by  international  loans  of  the  excess  of  imports, 
all  must  be  discarded.  The  seeking  of  support  from  the  govern- 
ments of  the  richer  countries  or  from  an  international  body  delays 
the  convalescense  of  the  financially  unsound  countries,  whose 
recovery  depends  upon  their  own  efforts  primarily. 

The  views  of  the  individual  economists  are  of  interest.^  Profes- 
sor M.  Pantaleoni's  remedy  is  the  laissez  faire  policy.  The  stop- 
ping of  inflation  by  governments  will  automatically  result  in  finan- 
cial stabilit}'.  Professor  Charles  Gide  emphasises  the  need  for 
international  action  such  as  the  cancellation  of  the  inter-Allied 
debts  and  the  guaranty  by  the  Entente  of  the  German  indemnity 
bonds.  Dr.  Bruins  advocates  the  cessation  of  inflation,  the  increase 
of  bank  rates,  the  funding  of  floating  foreign  debt,  and  the  restora- 
tion of  freedom  in  commerce  as  the  means  of  securing  stability 
of  currency  and  exchange.  He  regards  both  deflation  and  the 
establishment  of  new  gold  parities  as  subjects  for  future  considera- 
tion. An  international  loan  is  impracticable  in  his  opinion,  but 
he  advocates  international  cooperation  to  facilitate  the  extension 
of  private  credit  under  specific  guarantees. 

Professor  Pigou  also  advocates  the  cessation  of  inflation,  the 
funding  of  foreign  floating  indebtedness,  and  the  raising  of  the 
bank  rate.  He  would  then  reestablish  an  effective  gold  standard, 
at  the  pre-war  parity  if  the  depreciation  is  slight ;  otherwise  at  new 
lower  parities.  The  last  step,  however,  would  require  the  con- 
sideration by  a  com.mission  of  financial  experts.  Exchange  can  be 
stabilized  only  by  a  free  conversion  of  paper  and  gold  at  a  fixed 

'Paper  XIII  (2)  Memorandum  prepared  for  the  Internationa!  Finan- 
cial Conference  by  G.  W.  J.  Bruins  of  Holland.  (3)  Memorandum  of 
the  %vorld's  monetary  problems  by  Gustave  Cassel  of  Sweden.  (4) 
Memorandum  on  Credit  currency  and  exchange  fluctuations  by  A.  C. 
Pigou  of  Great  Britain.  (5)  Notes  on  the  financial  and  monetary  situa- 
tion by  Charles  Gide  of  France.  (6)  Memorandum  by  M.  Pantaleoni 
of  Italy. 


622        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

rate.  The  prerequisites  would  be  the  restoration  of  the  trade 
balance  and  the  possession  of  an  adequate  supply  of  gold.  In  inter- 
national trade,  Professor  Pigou  is  opposed  to  the  introduction  of  a 
new  money  of  account,  but  he  does  advocate,  in  contrast  to  Dr. 
Bruins,  bonds  issued  by  an  international  authority. 

Professor  Cassel  introduces  his  concept  of  "purchasing-power 
parities,"  which  equal  the  prewar  gold  parities  times  the  degree 
of  inflation.  The  prewar  exchange  parities  between  two  gold 
countries  was  the  ratio  of  the  gold  values  of  their  currencies.  But 
after  the  war,  the  "purchasing  power  parity"  in  country  B  of 
the  currency  of  country  A  depends  on  the  ratio  of  the  relative  rise 
in  prices  in  B  to  that  in  A.  That  is,  the  purchasing  power  in 
England  of  the  French  franc  varies  directly  with  rise  in  British 
prices  and  inversely  with  the  rise  in  French  prices. 

Applying  the  theory  of  "purchasing-power  parities,"  he  suggests 
that  the  currencies  can  be  stabilized  at  these  levels,  unless  the  restric- 
tions upon  foreign  trade  or  the  speculative  selling  abroad  of  paper 
money  or  bills  lead  to  abnormal  deviations  from  the  purchasing- 
power  parities.  Professor  Cassel  is  opposed  to  deflation  because 
it  would  cause  hardship  to  the  debtor  states  and  the  debtor  citizens. 
The  immediate  problem  is  to  check  inflation  and  the  question  of 
eventual  parities  cannot  be  fixed  until  stability  is  attained.  Profes- 
sor Cassel  is  strongly  opposed  to  a  new  international  currency; 
it  would  merely  complicate  the  situation,  or  else  would  create  new 
purchasing  power  and  thus  continue  the  process  of  inflation.  He 
is  also  opposed  to  large  international  loans.  Loans  must  be  between 
private  individuals  in  the  exporting  countries,  for  productive  pur- 
poses only  and  at  the  high  rates  current  in  the  lending  countries. 

D.  Policies  Recommended 

The  conference  divided  its  work  among  four  committees,  on 
public  finance,  on  currency  and  exchange,  on  international  trade, 
and  on  international  credit.  Their  recommendations  were  adopted 
unanimously  by  the  Conference.  These  conclusions  involved  no 
new  principles,  but  merely  a  restatement  of  well  known  facts. 
However,  in  three-quarters  of  the  countries  represented  at  the  Con- 
ference and  in  eleven-twelfths  of  the  countries  of  Europe  the 
budgets  did  not  balance  (in  the  autumn  of  1920)  and  showed  no 
prospect  of  balancing  in  the  near  future.    According  to  statements 


THE  BRUSSELS  FINANCIAL  CONFERENCE  623 

presented  at  the  Conference,  about  20  per  cent,  on  the  average, 
of  the  national  expenditure  was  being  devoted  to  armament  and 
to  preparation  for  war.  The  recommendations  of  the  committees 
may  seem  platitudes,  but  they  are  specific  remedies  for  the  finan- 
cial ills  affecting  the  European  countries. 

1.  Condemnation  of  Impracticable  Proposals 

The  resolutions  point  out  that  some  of  the  proposals  submitted 
were  impracticable,  and  that  both  nationally  and  internationally 
certain  economic  measures  must  be  abandoned.  In  addition,  posi- 
tive recommendations  were  made. 

The  Conference  committee  on  currency  and  exchange  clearly 
condemned  all  attempts  to  limit  fluctuations  in  exchange  by  means 
of  artificial  control.  Such  measures  disguise  the  underlying  evils 
and  prevent  the  operation  of  the  self-correctives.  The  committee 
was  also  opposed  to  fixing  the  ratio  of  existing  fiduciary  curr-encies 
to  their  nominal  gold  value,  because  of  the  impossibility  of  main- 
taining this  ratio  generally  unless  the  economic  revival  of  the 
several  countries  had  progressed  sufficiently  to  warrant  it.  Further- 
more, the  committee  doubted  the  feasibility  of  stabilizing  the 
value  of  gold  but  expressed  its  willingness  to  refer  the  question 
to  a  committee  to  be  organized.  In  addition  to  rejecting  these 
national  measures,  the  committee  also  opposed  the  adoption  of  an 
international  currency  or  of  an  international  unit  of  account, 
because  it  would  serve  no  useful  purpose  and  would  not  remove 
any  of  the  exchange  difficulties. 

ii.  The   Abandonment   of   Certain   National   Policies 

The  committee  on  public  finance  recommended  the  abandon- 
ment of  all  artificial  measures  which  gloss  over  the  defective  eco- 
nomic situation.  Such  measures  include  the  subsidies  on  food- 
stuffs, on  coal  and  on  other  elements  of  the  cost  of  living,  the 
payment  of  unemployment  doles  and  the  maintenance  of  charges 
for  railway,  postal  or  other  government  service  on  a  basis  insuffi- 
cient to  cover  the  cost.  Again,  borrowing  by  the  state  for  the 
purpose  of  covering  ordinary  current  expenditures  should  cease. 

The  committee  on  currency  and  exchange  in  its  resolutions 
recommended  the  abandonment  of  measures  leading  to  inflation, 
not  however  by  merely  restricting  the  issue  of  paper  money,  but 


624        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

by  removing  the  causes  which  make  it  necessary.  Again,  the  state 
must  abandon  its  control,  for  political  purposes,  of  the  banks  of 
issue.  Instead  not  only  should  they  cease  to  create  additional 
credit,  but  the  governments  and  municipalities  should  begin  to 
repay  or  refund  their  floating  debts.  The  elimination  of  all  super- 
fluous expenditure  is  the  prerequisite  to  this  policy. 

iii.  Positive  National  Policies  Recommended 

The  committee  on  public  finance  in  its  resolutions  pointed  out 
that  within  each  country  public  opinion  must  be  directed  to  the 
cause  of  the  present  unsound  condition,  in  order  to  bring  about 
the  adoption  of  corrective  measures.  The  excessive  expenditure 
of  governments  is  the  cause  of  inflation,  of  the  depreciation  of  the 
currency,  of  the  rise  in  prices  and  in  the  cost  of  living.  There- 
fore, each  government  must  balance  its  budget,  reduce  military 
burdens,  abandon  all  unproductive  outlay  and  restrict  even  pro- 
ductive extraordinary  expenditure  to  a  minimum.  Then,  as  a 
sequel  taxes  must  be  increased  until  revenue  fully  equals  the 
ordinary  recurrent  expenditure.  Additional  loans  for  urgent  capi- 
tal purposes  must  come  only  out  of  the  savings  of  the  people,  and 
by  the  same  means  only  mvist  the  undigested  floating  debt  be 
funded.  To  make  these  measures  possible,  production  must  be 
increased  through  the  cooperation  of  all  elements  of  the  population. 
The  committee  on  currency  and  exchange  advocated  similar  meas- 
ures and  in  addition  recommended  the  return  to  an  effective  gold 
standard  on  the  part  of  those  countries  which  had  abandoned  it. 
Countries  lacking  a  central  bank  of  issue  should  establish  one, 
even  if  it  requires  the  assistance  of  foreign  capital.  Deflation 
must  be  carried  out  gradually  and  carefully  to  prevent  disturbances 
to  trade  and  credit.  Finally,  until  the  volume  of  credit  can  be 
controlled  by  a  rise  or  fall  in  the  rate  of  interest  under  an  effec- 
tive gold  standard,  credit  priorities  should  be  granted  for  produc- 
tive and  remunerative  enterprises. 

iv.  The  Abandonment   of   Certain   International  Policies 

In  addition  to  these  national  measures,  certain  International 
policies  were  advocated.  The  committee  on  international  trade 
recommended  the  abandonment  of  preparations  for  war  and  the 
removal  of  the  atmosphere  of  war.     Similarly,  the  committee  on 


THE  BRUSSELS  FINANCIAL  CONFERENCE  625 

international  credits  stated  that  the  financial  markets  can  function 
normally  only  when  peaceful  relations  are  restored  between  all 
peoples,  and  the  present  uncertainty  concerning  the  international 
financial  settlements  is  removed.  The  Committee  recommended 
that  restrictions  on  international  trade  should  be  eliminated.  The 
committee  on  international  credits  did  not  favor  international  loans 
directly  by  governments,  and  the  committee  on  currency  and 
exchange  did  not  favor  discrimination  between  foreign  and  native 
holders  of  banknotes  or  bank  balances. 

V.  Positive  International  Policies  Recommended 

The  committee  on  public  finance  reconfirmed  the  statement  of 
the  Supreme  Council  of  the  Allied  powers  to  the  effect  that 
armaments  should  be  reduced  to  the  lov/est  possible  figure  com- 
patible with  national  security,  because  the  world  cannot  afford 
this  expenditure.  In  order  that  the  commerce  of  each  country 
may  be  devoted  to  strictly  productive  purposes  there  must  be  inter- 
national cooperation  for  the  removal  of  the  crushing  burden  which 
armaments  impose  on  the  impoverished  peoples  of  the  world,  sap- 
ping their  resources  and  imperiling  their  recovery  from  the  ravages 
of  war. 

Furthermore,  according  to  the  recommendations  of  the  com- 
mittee on  international  trade,  and  of  the  Supreme  Economic  Coun- 
cil, the  states  which  have  been  created  or  enlarged  as  a  result  of 
the  war  should  establish  full  cooperation  and  arrange  for  the 
unrestricted  interchange  of  commodities  in  order  that  the  essential 
unity  of  European  economic  life  should  not  be  impaired  by  the 
erection  of  artificial  economic  barriers.  However,  •  the  improve- 
ment of  the  general  economic  situation  will  require  a  considerable 
period  of  time  and  in  the  present  circumstances  it  is  impossible 
for  certain  countries  to  restore  their  economic  activity  without 
borrowing  abroad  for  periods  which  exceed  the  normal  term  of 
commercial  credit.  But,  this  assistance  can  be  accorded  only  to 
those  countries  which  are  prepared  to  cooperate  internationally  in 
the  restoration  of  their  economic  life.  (The  one  thoroughly  fea- 
sible proposal  on  international  credits  of  Ter  Meulen,  a  Dutch 
banker,  member  of  Hope  &  Co.,  is  treated  more  fully  elsewhere 
in  this  book.  See  p.  652.)  These  ends  may  be  accomplished  by 
giving  publicity  to  the  situation  of  the  public  finance  of  each  state 


626        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

and  therefore  it  was  recommended  that  all  the  nations  should 
furnish  the  Council  of  the  League  with  budget  estimates  and  cor- 
responding accounts  of  receipts  and  expenditures. 

E.  Text  of  the  Resolutions  Adopted 

The  following  abstracts  from  the  resolutions  adopted  unan- 
imously by  the  conference  give  the  principal  recommendations: 

Resolutions  of  the  Committee  on  Public  Finance 


Thirty-nine  nations  have  in  turn  placed  before  the  International 
Financial  Conference  a  statement  of  their  financial  position.  The 
examination  of  these  statements  brings  out  the  extreme  gravity  of 
the  general  situation  of  public  finance  throughout  the  world,  and 
particularly  in   Europe. 

Their  import  m.ay  be  summed  up  in  the  statement  that  three  out 
of  every  four  of  the  countries  represented  at  this  Conference,  and 
eleven  out  of  twelve  of  the  European  countries,  anticipate  a  budget 
deficit  in  the  present  year.  Public  opinion  is  largely  responsible 
for   this   situation. 

The  close  connection  between  these  budget  deficits  and  the  cost 
of  living,  which  is  causing  such  suffering  and  unrest  throughout 
the  world,  is  far  from  being  grasped.  Nearly  every  government  is 
being  pressed  to  incur  fresh  expenditure;  largely  on  palliatives  which 
aggravate  the  very  evils  against  which  they  are  directed. 

The  first  step  is  to  bring  public  opinion  in  every  country  to 
realize  the  essential  facts  of  the  situation  and  particularly  the  need 
for  reestablishing  public  finances  on  a  sound  basis  as  a  preliminary 
to  the  execution  of  those  social  reforms  which  the  world  demands. 

II 

Increase  of  production 

Public  attention  should  be  especially  drawn  to  the  fact  that  the 
reduction  of  prices  and  the  restoration  of  prosperity  is  dependent 
on  the  increase  of  production,  and  that  the  continual  excess  of 
government  expenditure  over  revenue  represented  by  budget  deficits 
is  one  of  the  most  serious  obstacles  to  such  increase  of  production, 
as  it  must  sooner  or  later  involve  the  following  consequences: — 

{a)   Further   inflation   of   credit   and   currency. 

{b)  A  further  depreciation  in  the  purchasing  power  of  the 
domestic  currency,  and  a  still  greater  instability  of  the  foreign 
exchanges, 

(c)   A  further  rise  in  prices  and  in  the  cost  of  living. 

The  country  which  accepts  the  policy  of  budget  deficits  is  tread- 
ing the  slippery  path  which  leads  to  general  ruin;  to  escape  from 
that  path  no  sacrifice  is  too  great. 


THE  BRUSSELS    FINANCIAL   CONFERENCE  627 

III 

Restriction  of  expenditure 

It  is  therefore  imperative  that  every  government  should,  as  the 
first  social   and  financial   reform,  on  which  all  others  depend: — 

(a)  Restrict  its  ordinary  recurrent  expenditure,  including  the 
service  of  the  debt  to  such  an  amount  as  can  be  covered  by  its 
ordinary  revenue. 

(b)  Rigidly  reduce  all  expenditure  on  armaments  in  so  far  as 
such  reduction  is  compatible  with  the  preservation  of  national 
security. 

(c)  Abandon   all   unproductive   extraordinary  expenditure. 

(d)  Restrict  even  productive  extraordinary  expenditure  to  the 
lowest  possible    amount. 

IV 

Reduction   of   armaments 

The  Supreme  Council  of  the  Allied  powers  in  its  pronouncement 
on  the  8th  March  declared  that  "Armies  should  everywhere  be 
reduced  to  a  peace  footing,  that  armaments  should  be  limited  to 
the  lowest  possible  figure  compatible  with  national  security,  and 
that  the  League  of  Nations  should  be  invited  to  consider,  as  soon 
as  possible,  proposals  to  this  end."  The  statements  presented  to  the 
Conference  show  that,  on  an  average,  some  20  per  cent  of  the 
national  expenditure  is  still  being  devoted  to  the  maintenance  of 
armaments  and  the  preparations  for  war. 

The  Conference  desires  to  affirm  with  the  utmost  emphasis  that 
the  world  cannot  afford  this  expenditure.  Only  by  a  frank  policy 
of  mutual  co-operation  can  the  nations  hope  to  regain  their  old 
prosperity;  and  in  order  to  secure  that  result  the  whole  resources 
of  each  country  must  be  devoted  to  strictly  productive  purposes. 

The  Conference  accordingly  recommends  most  earnestly  to  the 
Council  of  the  League  of  Nations  the  desirability  of  conferring  at 
once  with  the  several  governments  concerned,  with  a  view  to  secur- 
ing a  general  and  agreed  reduction  of  the  crushing  burden  which, 
on  their  existing  scale,  armaments  still  impose  on  the  impoverished 
peoples  of  the  world,  sapping  their  resources  and  imperilling  their 
recovery  from  the  ravages  of  war.  The  Conference  hopes  that  the 
Assembly  of  the  League  which  is  about  to  meet  will  take  energetic 
action  to  this  end. 


Abandonment  of  artificial  measures 

While  recognizing  the  practical  difficulties  in  the  way  of  im- 
mediate action  in  all  cases,  the  Conference  considers  that  every 
government  should  abandon  at  the  earliest  practicable  date  all 
uneconomical  and  artificial  measures  which  conceal  from  the  people 
the  true   economic   situation ;   such   measures   include : 

(a)  The  artificial  cheapening  of  bread  and  other  foodstuflFs, 
and  of  coal   and  other  materials  by  selling  them  below  cost  price 


628        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

to  the  public,   and  the  provision  of   unenaployment  doles  of  such  a 
character  as  to  demoralize  instead  of  encouraging  industry. 

{b)  The  maintenance  of  railway  fares,  postal  rates  and  charges 
for  other  government  services  on  a  basis  which  is  insufficient  to 
cover  the  cost  of  the  services  given,  including  annual  charges  on 
capital   account. 

VI 
Further  taxation  necessary 

In  so  far  as,  after  every  effort  has  been  made,  it  is  impossible 
to  cut  down  expenditure  within  the  limits  of  existing  revenues, 
fresh  taxation  must  be  imposed  to  meet  the  deficit,  and  this  process 
must  be  ruthlessly  continued  until  the  revenue  is  at  least  sufficient 
to  meet  the  full  amount  of  the  recurrent  ordinary  expenditure. 
The  Conference  considers  that  the  relative  advantages  of  the  various 
possible  means  of  increasing  the  national  revenue,  whether  by  direct 
or  indirect  taxation  or  by  a  capital  levy  (to  be  devoted  to  the  repay- 
ment of  debt),  depend  upon  the  special  economic  conditions  obtain- 
ing in  each  country,  and  that  in  consequence  each  country  must 
decide  for  itself  on  the  methods  which  are  best  suited  to  its  own 
internal   economy. 

VII 

Cessation  of  borroiuing 

If  ^he  above  principles  are  accepted  and  applied,  loans  will  not 
be  required  for  recurrent  ordinary  expenditure;  borrowing  for  that 
purpose  must  cease.  In  a  number  of  countries,  however,  although 
the  ordinary  charges  can  be  met  from  revenue,  heavy  extraor- 
dinary expenditure  must  at  the  present  time  be  undertaken 
on  capital  account.  This  applies  more  especially  in  the  case  of 
those  countries  devastated  during  the  war,  whose  reconstruction 
charges  cannot  possibly  be  met  from  ordinary  receipts.  The  restora- 
tion of  the  devastated  areas  is  of  capital  importance  for  the  re-estab- 
lishment of  normal  economic  conditions;  and  loans  for  this  purpose 
are  not  only  unavoidable  but  justifiable.  But  in  view  of  the  shortage 
of  capital  it  will  be  difficult  to  secure  the  sums  required  even  for 
this  purpose,  and  only  the  most  urgent  schemes  should  be  pressed 
forward  immediately. 

VIII 

Fresh  loans  met  out  of  savings 

The  means  by  which  loans  are  raised  are  no  less  important 
than  the  purposes  for  which  they  are  destined.  In  future  the  loans 
which  are  required  for  urgent  capital  purposes  must  be  met  out 
of  the  real  savings  of  the  people.  But  those  savings  have,  as  it 
were,  been  pledged  for  many  years  ahead  b)'  the  credits  created 
during  the  war,  and  the  first  step  to  raising  fresh  money  must  be  to 
fund  the  undigested  floating  obligations  with  which  the  markets 
are    burdened. 

These  principles  apply  both  to  internal  and  to  external  borrow- 
ing, and  in  regard  to  the  latter  we  suggest  that  it  would  be  in  the 
general  interest  for  the  creditor  countries  to  give  such  facilities  as 
may  be  possible  to  the  debtor  countries  to  fund  their  floating  obliga- 
tions at  the  earliest  possible  date.  .  .  . 


TFTF.  BRUSSELS  FINANCIAL  CONFERENCE  629 

X 

Strict  application  necessary 

The  Conference  is  of  opinion  that  the  strict  application  of  the 
principles  outlined  above  is  the  necessary  condition  for  the  reestab- 
lishment  of  public  finances  on  a  sound  basis.  A  country  which 
does  not  contrive  as  soon  as  possible  to  attain  the  execution  of  these 
principles  is  doomed  beyond  hope  of  recovery.  To  enable  govern- 
ments, however,  to  give  effect  to  these  principles,  all  classes  of  the 
community  must  contribute  their  share. 

Industry  must  be  organized  as  to  encourage  the  maximum  pro- 
duction on  the  part  of  capital  and  labor,  as  by  such  production  alone 
will  labor  be  able  to  obtain  those  improved  conditions  of  life  which 
it  is  the  aim  of  every  country  to  secure  for  its  people. 

All  classes  of  the  population,  and  particularly  the  wealthy,  must 
be  prepared  willingly  to  accept  the  changes  necessary  to  remedy 
the   present   situation. 

Above  all,  to  fill  up  the  gap  between  the  supply  of  and  the 
demand  for  commodities,  it  is  the  duty  of  every  patriotic  citizen 
to  practise  the  strictest  possible  economy  and  so  to  contribute  his 
maximum  eflfort  to  the  common  weal.  Such  private  action  is  the 
indispensable  basis  for  the  fiscal  measures  required  to  restore  public 
finances. 


Resolutions  of  the  Committee  on  Currency  and  Exchange 

The  currency  of  a  country,  in  the  sense  of  the  immediate  purchas- 
ing power  of  the  community,  includes  (a)  the  actual  legal  tender 
money  in  existence,  and  {b)  any  promises  to  pay  legal  tender,  e.  g., 
as  bank  balances — which  are  available  for  ordinary  daily  trans- 
actions. 

The  currencies  of  all  belligerent,  and  of  many  other  countries, 
though  in  greatly  varying  degrees,  have  since  the  beginning  of 
the  war  been  expanded  artificially,  regardless  of  the  usual  restraints 
upon  such  expansion  .  .  .  and  without  any  corresponding  increase 
in  the  real  wealth  upon  which  their  purchasing  power  was  based; 
indeed  in  most  cases  in  spite  of  a  serious  reduction  in  such 
wealth.  .  .  . 

The  effect  of  it  has  been  to  intensify,  in  terms  of  the  inflated 
currencies,  the  general  rise  in  prices,  so  that  a  greater  amount  of 
such  currency  is  needed  to  procure  the  accustomed  supply  of  goods 
and  services.  Where  this  additional  currency  was  procured  by 
further  "inflation"  (J.  e.,  by  printing  more  paper  money  or  creating 
fresh  credit)  there  arose  what  has  been  called  a  "vicious  spiral" 
of  constantly  rising  prices  and  wages  and  constantly  increasing 
inflation,  with  the  resulting  disorganization  of  all  business,  dislo- 
cation of  the  exchanges,  a  progressive  increase  in  the  cost  of  living, 
and  consequent   labor  unrest. 

I 

Therefore: 

It  is  of  the  utmost  importance  that  the  growth  of  inflation  should 
be  stopped,  and  this,  although  no  doubt  very  difficult  to  do  im- 
mediately in  some  countries,  could  quickly  be  accomplished   by   (i) 


630        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

abstaining  from  increasing  the  currency  .  .  .  and   (2)   by  increasing 
the  real   wealth  upon  which  such  currency  is  based. 

The  cessation  of  increase  in  the  currency  should  not  be  achieved 
merely  by  restricting  the  issue  of  legal  tender.  ...  It  is  necessary 
to  attack  the  causes  which  lead  to  the  necessity  for  the  additional 
currency.  .  .  . 

II 

Governinents  must  limit  their  expenditure  to  their  revenue.  .  .  . 


Ill 

Banks,  and  especially  Banks  of  Issue,  should  be  freed  from 
political  pressure  and  should  be  conducted  solely  on  the  lines  of 
prudent  finance.  .  .  • 

IV 

The  creation  of  additional  credit  should  cease  and  governments 
and  municipalities  should  not  only  not  increase  their  floating  debts, 
but  should  begin  to  repay  or  fund  them  by  degrees. 

In  normal  times  the  natural  and  most  effective  regulator  of  the 
volume  and  distribution  of  credit  is  the  rate  of  interest  which  the 
central  Banks  of  Issue  are  compelled,  ...  to  raise  when  credit  is 
unduly  expanding.  It  is  true  that  high  money  rates  would  be 
expensive  to  the  governments  which  have  large  floating  debts,  but  we 
see  no  reason  why  .  .  .  the  government  should  be  less  subject  to 
the  normal  measure  for  restricting  credit  than  the  individual  mem- 
bers of  the  community.  In  some  countries,  however,  the  financial 
machinery  has  become  so  abnormal  that  it  may  be  difficult  for  such 
corrective  measure  to  be  immediately  applied.  We  recommend, 
therefore,   that — 


Until  credit  can  be  controlled  merely  by  the  normal  Influence 
of  the  rate  of  interest,  it  should  only  be  granted  for  real  economic 
needs.  .  .  . 

The  complementary  steps  for  arresting  the  increase  of  inflation 
by  increasing  the  wealth  on  which  the  currency  is  based,  may  be 
summed  up  in  the  words:  increased  production  and  decreased  con- 
sumption. .  .  . 

Yet,  in  our  opinion,  the  production  of  wealth  is  in  many  countries 
suffering  from  a  cause  which  it  is  more  directly  in  the  power  of 
governments  to  remove,  viz.,  the  control  in  various  forms  which 
was  often  imposed  by  them  as  a  war  measure  and  has  not  yet  been 
completely  relaxed.  .  .  . 

VI 

Commerce  should  as  soon  as  possible  be  freed  from  control, 
and  impediments  to  international  trade  removed.  .  .  . 


THE  BRUSSELS   FINANCIAL   CONFERENCE  63 1 

VII 

All  superfluous  expenditure  should  be  avoided. 

To  attain  this  end,  the  enlightenment  of  public  opinion  is  the 
most  powerful  lever.  If  the  wise  control  of  credit  brings  dear 
money,  this  result  will  in  itself  help  to  promote  economy.  .  .  . 


VIII 

It  is  highly  desirable  that  the  countries  which  have  lapsed  from 
an  effective  gold  standard  should  return  thereto.  .  .  . 


IX 

It  is  useless  to  attempt  to  fix  the  ratio  of  existing  fiduciary  cur- 
rencies to  their  nominal  gold  value;  as,  unless  the  condition  of 
the  country  concerned  were  sufficiently  favorable  to  make  the  fixing 
of   such   ratio  necessary,  it  could  not  be  maintained. 

The  reversion  to,  or  establishment  of,  an  effective  gold  standard 
would  in  many  cases  demand  enormous  deflation  and  it  is  certain 
that  such — 

X 

Deflation,  if  and  when  undertaken,  must  be  carried  out  gradually 
and  with  great  caution ;  otherwise  the  disturbance  to  trade  and 
credit  might  prove  disastrous. 

XI 

We  cannot  recommend  any  attempt  to  stabilize  the  value  of 
gold  and  we  gravely  doubt  VN'hether  such  attempt  could  succeed.  .  .  . 


XII 

We  believe  that  neither  an  international  currency  nor  an  inter- 
national unit  of  account  would  serve  any  useful  purpose  or  remove 
any  of  the  difficulties  from  which  international  exchange  sufi^ers 
to-day. 

XIII 

We  can  find  no  justification  for  supporting  the  idea  that  foreign 
holders  of  bank  notes  or  bank  balances  should  be  treated  differ- 
ently from  native  holders. 

XIV 

In  countries  where  there  is  no  central  bank  of  issue,  one  should 
be  established,  and  if  the  assistance  of  foreign  capital  were  required 
for  the  promotion  of  such  a  bank,  some  form  of  international  con- 
trol might  be  required. 


632        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

XV 

Attempts  to  limit  fluctuations  in  exchange  by  imposing  artificial 
control  on  exchange  operations  are  futile  and  mischievous.  In  so 
far  as  they  are  effective  they  falsify  the  market,  tend  to  remove 
natural  correctives  to  such  fluctuations  and  interfere  vyith  free  deal- 
ings in  forward  exchange  which  are  so  necessary  to  enable  traders 
to  eliminate  from  their  calculations  a  margin  to  cover  risk  of  ex- 
change, which  would  otherwise  contribute  to  the  rise  in  prices.  .  .  . 

We  support  the  suggestion  that — 

XVI 

A  committee  should  be  set  up  both  for  continuing  the  collection 
of  the  valuable  financial  statistics  that  have  been  furnished  for 
this  Conference  and  also  the  further  investigation  of  currency 
policy. 

Resolutions  of  the  Committee  on  International  Trade 


The  International  Financial  Conference  affirms  that  the  first 
condition  for  the  resumption  of  international  trade  is  the  restoration 
of  real  peace,  the  conclusion  of  the  wars  which  are  still  being  waged, 
and  the  assured  maintenance  of  peace  for  the  future.  The  con- 
tinuance of  the  atmosphere  of  war  and  of  preparations  for  war  is 
fatal  to  the  development  of  that  mutual  trust  which  is  essential  to 
the  resumption  of  normal  trading  relations.  The  security  of  internal 
conditions  is  scarcely  less  important,  as  foreign  trade  cannot  prosper 
in  a  country  whose  internal  conditions  do  not  inspire  confidence. 
The  Conference  trusts  that  the  League  of  Nations  will  lose  no 
opportunity  to  secure  the  full  restoration  and  continued  maintenance 
of  peace. 

II 

The  International  Financial  Conference  affirms  that  the  improve- 
ment of  the  financial  position  largely  depends  on  the  general  res- 
toration as  soon  as  possible  of  good-will  between  the  various  nations; 
and  in  particular  it  endorses  the  declaration  of  the  Supreme  Council 
of  the  8th  March  last  "that  the  States  which  have  been  created  or 
enlarged  as  a  result  of  the  war  should  at  once  reestablish  full 
and  friendly  cooperation,  and  arrange  for  the  unrestricted  inter- 
change of  commodities  in  order  that  the  essential  unity  of  European 
economic  life  may  not  be  impaired  by  the  erection  of  artificial 
economic  barriers." 

Ill 

The  Conference  recommends  that,  within  such  limits  and  at  such 
time  as  may  appear  possible,  each  country  should  aim  at  the  pro- 
gressive restoration  of  that  freedom  of  commerce  which  prevailed 
before  the  war,  including  the  withdrawal  of  artificial  restrictions 
on,   and  discriminations  of  price  against,  external  trade.  .  .  . 


THE  BRUSSELS  FINANCIAL  CONFERENCE  633 

VI 

The  International  Financial  Conference  expresses  the  conviction 
that  the  repair,  improvement  and  economical  use  of  the  transport 
systems  of  the  world,  and  particularly  of  countries  affected  by  the 
war,  are  of  vital  importance  to  the  restoration  of  international 
trade. 

Resolutions  of  the  Committee  on  International  Credits 


The  Conference  recognizes  in  the  first  place  that  the  difficulties 
which  at  present  lie  in  the  way  of  international  credit  operations 
arise  almost  exclusively  out  of  the  disturbance  caused  by  the  war, 
and  that  the  normal  working  of  financial  markets  cannot  be  com- 
pletely re-established  unless  peaceful  relations  are  restored  between 
all  peoples  and  the  outstanding  financial  questions  resulting  from  the 
war  are  made  the  subject  of  a  definite  settlement  which  is  put  into 
execution. 

II 

The  Conference  is,  moreover,  of  opinion  that  the  revival  of 
credit  requires  as  primary  conditions  the  restoration  of  order  in 
public  finance,  the  cessation  of  inflation,  the  purging  of  currencies, 
and  the  freedom  of  commercial  transactions.  The  resolutions  of  the 
Commission  on  International  Credits  are  therefore  based  on  the 
resolutions  of  the  other  commissions. 


Ill 

The  Conference  recognizes,  however,  that  this  general  improve- 
ment In  the  situation  requires  a  considerable  period  of  time,  and  that 
in  present  circumstances  it  is  not  possible  for  certain  countries  to 
restore  their  economic  activity  without  assistance  from  abroad.  This 
assistance  is  required  for  periods  which  exceed  the  normal  term  of 
commercial  operations. 

IV 

The  Conference  Is  of  opinion  that  in  principle  the  resources  out 
of  which  this  assistance  Is  to  be  provided  should  be  found  from 
the  savings  of  the  lending  countries  and  must  not  result  in  undue 
increase  of  the  fiduciary  circulation — that  is  to  say,  in  the  creation 
or  extension  of  a  disproportion  between  means  of  payment  and  the 
genuine  requirements  of  business.  .  .  . 

VI 

The  Conference  does  not  believe  that,  apart  from  particular 
decisions  dictated  by  national  Interests  or  by  considerations  of 
humanity,   credits   should   be    accorded   directly  by   goyernments. 


634        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

VII 

It  appears  to  the  Conference  that  one  of  the  chief  obstacles  to 
the  granting  of  credits  is  the  absence  in  borrowing  countries  of 
sufficient  security  for  ultimate  repayment.  The  Conference  there- 
fore studied  with  attention  in  the  light  of  the  general  considerations 
enumerated  above,  all  the  proposals  presented  with  a  view  to  creat- 
ing guarantees  which  would  provide  satisfactory  security  for  ex- 
porters. 

The  Conference  has  been  forced  to  recognize  that  no  single 
system  could  by  itself  suffice  to  provide  for  the  many  different  needs 
of  the  various  countries,  and  that  it  is  necessary  to  indicate  a  series 
of  measures  sufficiently  elastic  to  be  adapted  afterwards  to  every 
variety   of   circumstances. 

For  these  reasons  the  Conference  decided  to  make  the  following 
recommendations : 

VIII 

An  international  organization  should  be  formed  and  placed  at 
the  disposal  of  states  desiring  to  have  resort  to  credit  for  the  pur- 
pose of  paying  for  their  essential  imports.  These  states  would  then 
notify  the  assets  which  they  are  prepared  to  pledge  as  security-  for 
the  sake  of  obtaining  credit,  and  would  come  to  an  understanding 
with  the  international  organization  as  to  the  conditions  under  which 
these  assets  would  be  administered. 

The  bonds  issued  against  this  guarantee  would  be  used  as  col- 
lateral for  credits  intended  to  cover  the  cost  of  commodities. 

A  plan  based  upon  these  principles  .  .  .  has  been  devised  to 
enable  states  to  facilitate  the  obtaining  of  commercial  credits  by 
their  nationals.  It  is  easy  to  see  that  the  scheme  is  susceptible  of 
development  in  various  directions,  and  that  some  of  its  provisions 
might  be  adapted  so  as  to  facilitate  the  extension  of  credit  direct  to 
public  corporations. 

A  committee  of  financiers  and  business  men  should  be  nominated 
forthwith  by  the  Council  of  the  League  of  Nations  for  the  purpose 
of  defining  the  measures  necessary  to  give  practical  effect  to  this 
proposal. 

IX 

It  has  been  represented  to  the  Conference  that  more  complete 
results  might  be  achieved  if  the  bonds  used  as  collateral  were  to 
carry  some   international   guarantee. 

The  Conference  sees  no  objection  to  the  further  consideration  of 
this  proposal.  .  .  . 


It  has  also  been  represented  to  the  Conference  that  an  extension 
on  international  lines  of  the  existing  system  of  export  credit  insur- 
ance would  in  many  instances  be  of  great  value  in  developing 
trade  with  countries  where  political  and  social  conditions  give  rise 
to  an  anxiety  which  is  often  exaggerated  by  exporters.  The  Con- 
ference believes  that  an  extension  of  this  kind  is  worthv  of  con- 
sideration, and  that  it  should  be  examined  in  detail  by  experts. 


THE  BRUSSELS  FINANCIAL  CONFERENCE  63$ 

XI 

The  attention  of  the  Conference  has  been  called  to  the  present 
system  of  "finishing  credits,"  that  is  to  say,  of  credits  under  which 
a  lien  in  favor  of  the  exporter  or  a  banker  is  maintained  on  the 
raw  material  in  all  its  different  stages  and  upon  the  proceeds  of 
the  manufactured  article.  This  system  has  suffered  greatly  owing 
to  the  lack,  in  many  countries,  of  sufficient  legal  protection  for  the 
exporter  throughout  the  various  stages  of  importation,  manufacture, 
re-exportation  and  sale.  The  Conference  would  suggest  that  the 
Council  be  recommended  to  draw  the  attention  of  the  different 
governments  to  this  question,  and  to  summon  an  advisory  body  of 
legal  experts  and  business  men  to  specify  the  legislative  action  which 
it  would  be  desirable  to  take  in  order  to  attain  the  desired  object 
in  each  of  the  countries  concerned. 


XII 

Apart  from  the  above-mentioned  proposals  which  the  Conference 
recommends  the  League  of  Nations  to  adopt,  and  if  possible  to 
apply  in  practice,  the  Conference  believes  that  the  activities  of  the 
League  might  usefully  be  directed  towards  promoting  certain  reforms, 
and  collecting  the  relevant  information  required  to  facilitate  credit 
operations.  In  this  connection  the  Conference  considers  it  well  to 
draw  attention  to  the  advantages  of  making  progress  under  each 
of  the  following  heads: 

(i)  Unification  of  the  laws  relating  to  bills  of  exchange  and  bills 
of   ladings; 

(2)  The  reciprocal  treatment  of  the  branches  of  foreign  banks 
in  different  countries ; 

(3)  The  publication  of  financial  information  in  a  clear,  com- 
parative form; 

(4)  The  examination  of  claims  by  the  holders  of  bonds  the 
interest  on  which  is  in  arrear; 

(5)  An  international  understanding  on  the  subject  of  lost,  stolen 
or  destroyed  securities ; 

(6)  The  establishment  of  an  international  clearing  house; 

(7)  An  international  understanding  which,  while  ensuring  the 
due  payment  by  everyone  of  his  full  share  of  taxation,  would  avoid 
the  imposition  of  double  taxation  which  is  at  present  an  obstacle  to 
the  placing  of  investments  abroad. 


XIII 

During  the  course  of  its  deliberations  the  Conference  could  not 
fail  to  be  impressed  by  the  fact  that  all,  or  almost  all,  of  the  many 


636        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

proposals  submitted  for  its  consideration  require  at  some  stage  the 
active  intervention  of  the  League  of  Nations.  The  Conference  is 
unanimously  in  sympathy  with  this  tendency,  and  believes  that  it  is 
desirable  to  extend  to  the  problems  of  finance  that  international 
co-operation  which  the  League  of  Nations  has  inaugurated,  and 
which  it  is  attempting  to  promote  in  order  to  improve  the  general 
situation  and  maintain  the  peace  of  the  world. 

F.  An  Appraisal  of  the  Conference 

Before  the  meeting  of  the  Brussels  Conference,  extravagant 
expectations  of  its  possibilities  were  entertained.  One  of  the 
neutral  papers  anticipated  that  it  would  furnish  suggestions  to 
bring  about  a  decline  in  prices,  another  referred  to  the  possibility 
of  stabilizing  exchange  and  arriving  at  a  settlement  of  the  ques- 
tion of  indemnities.  A  German  daily  expected  that  it  would  lead 
to  an  international  loan  to  provide  Germany  with  foodstuffs  and 
raw  materials.  Sir  George  Paish  hoped  that  it  would  draft  a  plan 
to  meet  the  world's  economic  and  financial  difficulties  resulting 
from  the  war.  Like  some  magic  fairy  wand,  the  Conference  was 
to  fulfill  the  wishes  of  each  of  the  nations.  On  the  other  hand, 
some  of  the  earlier  appraisals  underrated  its  potentialities.  As  a 
matter  of  fact,  the  bankers  of  the  world  expected  but  little  from 
it,  for  unlike  any  of  the  important  international  gatherings  during 
1 91 9  and  1920,  it  caused  no  fluctuations  in  exchange  rates,  a  sure 
test  of  its  practical  significance. 

In  its  own  official  statement,  the  International  Financial  Con- 
ference at  Brussels  gave  a  reasonably  accurate  estimate  of  its  work. 
"Whatever  may  be  the  future  of  our  positive  proposals,  the  Con- 
ference cannot  have  been  in  vain.  It  has  been  a  gathering  unique 
in  the  history  of  the  world,  not  of  statesmen  working  in  the  inter- 
est of  their  particular  countries,  but  of  experts  from  all  nations 
working  for  the  solution  of  the  common  problem  of  the  whole 
world.  ...  A  spirit  of  close  and  intimate  cooperation,  such  as 
might  scarcely  have  been  thought  possible,  developed.  That  coop- 
eration is  not  itself  a  factor  of  the  utmost  importance.  Some  of 
the  recommendations  of  the  Conference  may  appear  axiomatic. 
Their  adoption,  however,  would  mean  a  fundamental  change  in  the 
policies  of  the  great  majority  of  the  European  countries.  The 
members  of  the  Conference  call  special  attention  to  the  way  in 
which  representatives  of  39  countries,  representing  about  75  per  cent 
of  the  population  of  the  world,  have  been  able,  through  a  fortnight's 


THE  BRUSSELS  FINANCIAL  CONFERENCE  637 

discussion,  to  arrive  at  a  general  agreement  as  to  the  features  of 
the  world's  financial  position  and  to  some  of  the  most  important 
measures  urgently  required  for  its  restoration.  They  have  been 
able  to  give  to  their  suggestions  the  force  of  collective  and  unan- 
imous recommendations." 

As  a  result  of  the  Conference  the  Council  of  the  League  of 
Nations  established  a  provisional  Economic  and  Financial  Com- 
mittee, to  collect  and  disseminate  information  and  to  take  steps 
tow^ard  carrying  out  its  recommendations.  Subsequently,  the  new 
Committee  on  International  Credits  was  established  and  a  con- 
ference of  bankers,  merchants  and  insurance  men  was  held  in 
London  to  discuss  the  question  of  export  credit  insurance. 

The  estimate  by  the  Conference  of  its  work  is  moderate  and 
probably  correct.  The  clear  statement  of  the  difficulties,  and  the 
prestige  attaching  to  its  unanimous  recommendations  cannot  fail 
to  lead  to  measures  in  the  right  direction  in  each  country,  as  well 
as  internationally. 


CHAPTER  XIX 

INTERNATIONAL  LOANS  FOR  THE  RESTORATION 
OF  EUROPE  ^ 

A.  The  Need  for  Internatioxal  Loans 

As  a  result  of  the  facility  with  which  inter-government  loans 
were  negotiated  during  the  war,  the  European  countries  desired 
their  continuance  after  the  war.  Several  important  financial 
authorities,  among  others  Sir  George  Paish,  Professor  Charles  Gide, 
and  Luigi  Luzzatti,  pleaded  for  loans  by  the  United  States  govern- 
ment. However,  the  sentiment  against  further  government  loans 
was  crystallized  in  the  early  part  of  1920.  Mr.  Herbert  Hoover, 
on  January  6,  1 920,  stated,  "I  emphatically  disagree  with  the 
statements  circulated  by  European  propagandists  that  our  Treasury 
must  supply  further  large  loans.  The  problem  is  one  of  ratifica- 
tion of  peace  and  ordinary  business  processes  and  not  one  of  increas- 
ing our  burden  of  taxation.  .  .  .  The  world  needs  to  get  away 
from  the  notion  of  governmental  help  both  internal  and  external, 
and  get  back  to  work  and  peace."-  On  January  28,  1920,  Secre- 
tary Carter  Glass  expressed  similar  unequivocal  opposition  to  gov- 
ernment loans.^  "Such  things  as  international  guarantees  and  in- 
ternational measures  for  the  stabilization  of  exchange  are  utterly 
impracticable,  so  long  as  there  exist  inequalities  of  taxation  and 
domestic  financial  policies  in  the  various  countries  involved.  It 
Is  unthinkable  that  the  people  of  a  country  which  has  been  called 
upon  to  submit  to  so  drastic  a  program  of  taxation  as  that  adopted 
by  the  United  States  should  undertake  to  remedy  the  inequalities 
of  exchange  resulting  from  a  less  drastic  policy  of  domestic  taxa- 

^  Jenn}',  Frederic,  Les  credits  internationaux.  Revue  Politique  et 
Parlementaire,  Dec.  10,  1920,  pp.  353-370. 

^  Federal   Reserve  Bulletin,   February,   1920,  pp.   140-141. 

'Letter  to  Homer  L.  Ferguson,  President  of  the  Chamber  of  Com- 
merce of  the  United  States  of  America.  Federal  Reserve  Bulletin,  Febru- 
ary, 1920,  pp.  137-139.  Also  Annual  Report  Secretary  of  the  Treasury, 
1920,  pp.  80-84. 

638 


INTERNATIONAL    LOANS  639 

tion  adopted  by  the  other  governments  of  the  world.  .  .  .  The 
consequences  of  the  world's  greatest  war  are  profound  and  inescap- 
able. .  .  .  The  process  of  healing  the  wounds  inflicted  by  the  war 
must  necessarily  be  slow  and  painful.  .  .  .  We  must  depend  upon 
the  independent  activity  of  each  person  affected  to  repair  his  own 
fortunes,  with  the  assistance  of  his  business  connections  in  other 
countries,  and  also  upon  each  individual  to  return  to  a  normal  life 
of  industry  and  economy."  About  a  year  later,  Premier  Lloyd 
George  took  a  similar  attitude.  "Everybody  w^anted  the  govern- 
ment to  assume  the  whole  risk  of  the  establishment  of  credits,  but 
that  was  unfair  because  it  was  the  risk  of  the  taxpayer."  ^  Never- 
theless, loans  of  some  kind  there  must  be,  for  in  central  and  eastern 
Europe  hundreds  of  millions  of  people  suffer  from  under-consump- 
tion  and  on  the  other  hand  the  countries  which  are  the  sources  of 
supply  of  food  and  raw  materials  are  suffering  from  overproduction. 
Aside  from  social  maladjustments  and  political  difficulties,  the 
prime  need  of  Europe  is  credit  until  its  peoples  are  in  a  position  to 
restore  the  normal  bases  of  financing  their  imports. 

B.  The  Prerequisites  and  Conditions  of  International 

Loans 

International  loans  are  not  the  first  step  in  the  restoration  of 
Europe.  Other  more  fundamental  requirements  must  be  met. 
The  governments  of  Europe  must  stop  fighting  and  cease  prepara- 
tion for  war,  must  balance  their  budgets,  check  unnecessary  imports, 
fund  the  foreign  floating  debt,  and  cooperate  in  a  friendly  spirit 
both  in  the  settlement  of  the  international  difficulties  arising  out 
of  the  v/ar  and  in  the  resumption  of  the  peaceful  processes  of 
trade.^ 

The  Supreme  Economic  Council,  in  a  statement  on  March  8, 
1920,  summed  up  these  prerequisites  In  a  concise  manner.  "Firstly, 
it  is  of  paramount  importance  that  business  conditions  should  be 
fully  restored  throughout  the  world  at  the  earliest  possible  moment. 
Secondly,  not  only  the  governments  of  each  country  but  all  those 

*  Address  in  the  House  of  Commons,  Feb.  17,  1921. 

*  Declaration  by  Supreme  Council  of  the  Peace  Conference  on  the 
Economic  Conditions  of  the  World,  March  8,  1920.  British  White  Paper 
[Cmd  646].  Jenny,  Frederic,  Le  Memorandum  Economique,  Revue 
Politique  et  Parlementalre  (avec  texte)  April  10,  1920,  pp.  49-79. 


640        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

engaged  in  production  everywhere  should  give  attention  to  those 
measures  which  will  contribute  to  the  full  resumption  of  peaceful 
industry,  to  the  encouragement  of  a  better  output  on  the  part  of 
the  workers,  and  to  the  improvement  of  machinery  and  the  means 
of  transportation.  Thirdly,  each  country  should  urge  upon  its 
nationals  the  vital  necessity  of  suppressing  extravagance  and  reduc- 
ing expenditure,  so  as  to  bridge  the  gap  which  must  for  some  years 
exist  between  the  demand  for  and  the  supply  of  essential  com- 
modities. Fourthly,  it  is  essential  that  early  steps  should  be  taken 
to  secure  the  deflation  of  credit  and  currency." 

Until  the  German  indemnity  is  fixed  at  such  a  figure  as  will 
assure  European  peace  and  economic  productivity,  budgets  will  not 
balance,  the  depreciation  of  exchange  will  not  be  arrested,  and 
international  credit  cannot  be  established  on  a  sound  basis. 

After  these  prerequisites  shall  have  been  attended  to  by  the 
borrowing  governments  and  peoples,  private  credits  may  safely  be 
extended.  However,  the  granting  of  new  loans  to  Europe  will  be 
subject  to  certain  conditions  which  the  lenders  have  the  right  to 
insist  upon.  Europe  is  staggering  under  the  burden  of  war  debts, 
both  internal  and  external.  In  addition,  the  defeated  powers  have 
huge  reparations  claims  to  pay.  Additional  credit  for  Europe  will 
not  be  forthcoming  unless  it  has  a  priority  over  all  previous  claims, 
including  reparations  claims.  One  of  the  surest  ways  of  prevent- 
ing the  recovery  of  Europe  would  be  the  enforcement  of  Article 
IV  of  the  Reparations  Note  of  January  29,  1 921,  which  reads, 
"Germany  shall  not  directly  embark  in  any  credit  operations  out- 
side of  her  own  territory  without  the  approval  of  the  Reparations 
Commission."  Europe  to-day  is  virtually  if  not  formally  insolvent, 
and  therefore  to  obtain  new  credits  it  must  submit  to  the  same 
conditions  that  a  bankrupt  corporation  accepts  in  order  again  to 
become  a  going  concern.  Receivers'  certificates  which  have  a  prior 
claim  over  all  other  indebtedness  are  frequently  the  means  of  restor- 
ing a  bankrupt  corporation.  New  loans  to  Europe  will  have  to  par- 
take of  the  nature  of  receivers'  certificates.  As  such  these  loans 
will  have  to  be  free  from  taxation  in  the  country  of  the  borrower 
and  be  guaranteed  by  his  government.  In  order  to  increase  the 
probability  of  payment  new  loans  must  be  made  on  a  business  basis ; 
to  attract  funds  in  a  competitive  market  they  must  be  at  the  pre- 
vailing interest  rate.  There  must  be  a  priority  in  the  allocation 
of  funds  to  the  most  remunerative  enterprises,  both  to  insure  the 


INTERNATIONAL    LOANS  64 1 

safety  of  the  interest  of  the  lender  and  to  hasten  the  recovery  of 
the  borrower.  The  machinery  of  international  credit  must  not  be 
cumbersome,  and  it  must  not  involve  any  international  liability, 
international  guaranty,  or  international  government. 


C.  Proposed  Types  of  Loans 

After  the  armistice  speculation  was  rife  concerning  the  types 
of  international  loans  that  would  be  necessary  for  the  reestablish- 
ment  of  trade.  Government  loans,  private  loans,  loans  by  the 
League  of  Nations,  loans  to  France  against  the  reparations  claims, 
and  loans  to  the  Central  Powers  under  the  terms  of  the  treaty 
are  but  a  few  of  the  types  into  which  the  proposals  may  be  clas- 
sified. 

According  to  the  original  memorandum  of  January  15,  1920, 
recommending  the  calling  of  a  conference,  the  views  of  the  signa- 
tories were  inclined  toward  government  loans  in  principle  but 
opposed  to  it  in  the  form  recommended. 

"The  signatories  submit  that,  while  much  can  be  done  through 
normal  banking  channels,  the  working  capital  needed  is  too  large 
in  amount  and  is  required  too  quickly  for  such  channels  to  be  ade- 
quate. They  are  of  opinion  therefore  that  a  more  comprehensive 
scheme  is  necessary.  It  is  not  a  question  of  affording  aid  only  to 
a  single  country,  or  even  a  single  group  of  countries  which  were 
allied  in  the  war.  The  interests  of  the  whole  of  Europe  and  indeed 
of  the  whole  world  are  at  stake. 

"It  is  not  our  intention  to  suggest  in  detail  the  method  by  which 
such  international  cooperation  in  the  grant  of  credit  may  be  secured. 
But  we  allow  ourselves  the  following  observations: 

"i.  The  greater  part  of  the  funds  must  necessarily  be  supplied 
by  those  countries  where  the  trade  balance  and  the  exchanges  are 
favorable. 

"2.  Long-term  foreign  credit,  such  as  is  here  contemplated,  is  only 
desirable  in  so  far  as  it  is  absolutely  necessary  to  restore  productive 
processes.  It  is  not  a  substitute  for  those  efforts  and  sacrifices  on  the 
part  of  each  country  by  which  alone  they  can  solve  their  internal 
problem.  It  is  only  by  the  real  economic  conditions  pressing  severely, 
as  they  must,  on  the  individual  that  equilibrium  can  be   restored. 

"3.  For  this  reason,  and  also  because  of  the  great  demands  on 
capital  for  their  own  internal  purposes,  in  the  lending  countries 
themselves,  the  credit  supplied  should  be  reduced  to  a  minimum 
absolutely   necessary. 

"4.  Assistance  should  as  far  as  possible  be  given  in  a  form  which 
leaves  national  and  international  trade  free  from  the  restrictive 
control   of   governments. 


642        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

"5.  Any  scheme  should  encourage  to  the  greatest  extent  possible 
the  supply  of  credit  and  the  development  of  trade  through  normal 
channels. 

"6.  In  so  far  as  it  proves  possible  to  issue  loans  to  the  public 
in  the  lending  countries,  these  loans  must  be  on  such  terms  as  v^ill 
attract  the  real  savings  of  the  individual,  othervrise  inflation  would 
be  increased. 

"7.  The  borro^^ing  countries  would  have  to  provide  the  best 
obtainable  security.     For  this  purpose  it  should  be  agreed  that: 

"(a)  Such  loans  should  rank  in  front  of  all  other  indebtedness 
whatsoever,  whether  internal  debt,  reparation  pajTnents  or  inter- 
Allied   governmental    debt. 

"(b)  Special  security  should  be  set  aside  by  the  borrowing 
countries  as  a  guarantee  for  the  payment  of  interest  and  amortiza- 
tion, the  character  of  such  security'  varying  perhaps  from  country 
to  country,  but  including  in  the  case  of  Germany  and  the  new  states 
the  assignment  of  im.port  and  export  duties  payable  on  a  gold  basis, 
and  in  the  case  of  states  entitled  to  receipts  from  Germany,  a  first 
charge  on  such  receipts." 

The  subjects,  barter  as  a  substitute  for  international  credit, 
the  estabh'shment  of  trade  clearing  houses  or  barter  institutes,  and 
the  compilation  of  lists  of  goods  in  surplus  and  goods  in  demand 
have  been  treated  elsewhere  in  this  book.  The  subject  of  refining 
credits,  or  the  furnishing  of  raw  materials  to  a  manufacturer  under 
a  trustee  arrangement  and  the  return  by  him  of  a  portion  of  the 
finished  goods,  were  discussed  at  the  Conference.''  However,  the 
possibilities  of  both  barter  and  of  refining  credits  are  limited.  As 
was  pointed  out  by  a  prominent  European  banker,  "The  clearing 
house  for  commodities,  which  has  been  suggested  for  the  barter  of 
goods  between  two  countries,  is  impossible,  since  it  could  only  work 
by  resorting  to  trade  monopolies  and  government  control.  Barter 
could  only  be  conducted  on  a  small  scale  by  individual  firms  in 
Germany  with  individual  foreign  firms."  ''  Trade  unionists  have 
objected  to  the  plan  of  refining  trade  credits  on  the  ground  that 
labor  in  the  country  consuming  the  finished  goods  must  compete 
with  the  underpaid  and  undernourished  workers  of  the  impoverished 
countries  of  Europe.  On  the  other  hand,  labor  in  the  latter  coun- 
tries has  objected  to  being  sweated  for  the  benefit  of  the  foreign 
manufacturer. 

•  International  Financial  Conference,  Paper  XII,  scheme  of  Herr  Meinl, 
pp.  13-18.     Also  Paper  XIII,   (2),  G.  W.  G.  Bruins,  pp.  20-21. 

'  Warburg,  Max  M.,  Restoration  of  German  Exchange.  Address  at 
the  Annual  Convention  of  the  German  Bankers  Association,  October  26, 
1920. 


INTERNATIONAL    LOANS  643 

i.  Loans  by  Governments  or  an  International  Body 

From  the  time  of  the  armistice  until  the  Brussels  Financial 
Conference  numerous  proposals  were  put  forward  for  loans  by 
governments,  by  the  League  of  Nations,  or  by  an  international 
body  which  was  to  be  created. 

(a)  Keynes'  Proposal — 

In  concluding  his  remedies  for  the  disorganization  resulting 
from  the  peace,  J.  M.  Keynes  ^  advocated  a  large  loan  by  the 
neutrals,  the  United  Kingdom,  and  the  United  States,  to  provide 
credits  for  the  countries  of  continental  Europe.  He  set  a  figure 
of  $1000  million,  "The  aggregate  sum  reequired  might  not  be  so 
large  as  is  supposed."  In  spite  of  the  precedent  established  by 
the  cancellation  of  the  inter-Allied  war  debt,  the  new  loan  should 
be  extended  "with  the  unequivocal  intention  of  its  being  repaid  in 
full,"  as  if  the  war  debts  were  not  so  contracted.  To  insure  this 
end  he  advocated  a  strong  security,  and  the  priority  of  the  new 
money  ahead  of  all  reparations  claims,  the  inter-Allied  war  debt, 
and  internal  war  loans.  Countries  entitled  to  reparation  payments 
should  be  required  to  pledge  such  receipts  to  the  repayment  of  the 
new  loan,  and  all  the  borrowing  countries  should  be  required  to 
pledge  their  customs  receipts  to  the  service  of  the  new  loan. 

(b)  Paish's  Proposal — 

In  1919  and  1920,  Sir  George  Paish  repeatedly  made  the  pro- 
posal that  the  most  effective  method  of  dealing  with  the  European 
situation  was  by  means  "of  a  cooperative  effort  of  the  most  com- 
prehensive character."  He  suggested  that  the  credit  of  the  League 
of  Nations  be  pledged  "for  the  payment  of  food,  raw  m.aterials 
or  manufactured  goods  which  the  nations  may  supply  to  each  other 
at  the  present  time  and  for  which  they  are  unable  to  obtain  pay- 
ment in  goods  or  in  other  products.^  .  .  .  An  issue  of  League  of 
Nations  bonds  free  from  taxation  in  all  countries  and  enjoying 
good  markets  in  every  country  of  the  world  would  enable  the 
present   situation   to   be   effectively   dealt   with   and   the   peril   to 

*The  Economic  Consequences  of  the  Peace,  pp.  283,  288,  American 
edition. 

"Paish,  Sir  George,  The  World  Breakdown,  Annals  of  the  Acad. 
Soc.  and  Pol.  Sci.,  May,  1920,  pp.  225   and  226. 


644        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

Europe  to  be  safely  overcome."  This  League  of  Nations  loan 
would  be  for  about  $25,000  million,  an  amount  needed  to  repair 
the  war  damages,  to  fund  the  foreign  debts  of  the  Allied  Powers 
and  to  reorganize  the  currency  and  finances  of  Russia.  Of  this 
amount  the  United  States  was  to  contribute  20  per  cent,  or  $5000 
million.  Great  Britain  another  20  per  cent,  and  the  remainder 
would  be  distributed  among  the  other  powers  of  the  world.  These 
bonds  would  also  be  used  in  the  settlement  of  international  trade 
debts  and  would  therefore  be  helpful  in  stabilizing  exchange 
rates."  " 

(c)    F and er lip's  Proposal — 

The  basic  thesis  of  Mr.  Vanderlip's  proposal  was  that  the 
European  situation  must  be  treated  as  a  whole,  and  a  comprehen- 
sive loan  was  the  prerequisite  to  restore  industry  in  the  European 
countries.  His  scheme  ^^  did  not  contemplate  loans  by  govern- 
ments, but  rather  by  private  investors.  One  formula  was  to  apply 
to  all  the  borrowing  countries.  Very  strong  security  would  have 
to  underlie  the  loan,  and  the  lenders  would  determine  in  advance 
the  basis  of  the  apportionment  among  the  several  nations.  As  a 
condition  of  the  loan,  the  lenders  should  insist  that  the  entire 
proceeds  should  be  devoted  to  productive  enterprises  and  not  to  the 
fiscal  needs  of  the  government.  The  participants  in  this  interna- 
tional loan  were  to  be  the  United  States,  Japan,  the  leading  neutral 
countries,  and  perhaps  Great  Britain.  The  governments  of  the 
lending  nations  would  appoint  a  group  of  bankers  and  each  country 
would  appoint  a  member  to  an  international  loan  commission, 
whose  duties  would  be  to  determine  the  proportionate  distribution 
of  the  total  loan  to  each  borrowing  country  and  also  to  decide 
what  goods  were  to  be  furnished.  As  security  each  borrowing 
nation  would  pledge  a  first  lien  upon  the  customs  revenue  to  meet 
its  share  of  the  international  loan. 

Mr.  Vanderlip  opposed  the  rediscounting  of  indemnity  claims 
against  Germany  upon  the  part  of  the  lending  countries.  On  the 
other  hand  Professor  Charles  Gide,  contemplated  that  the  Allied 
governments  would  guarantee  the  German  indemnity  bonds  which 
were  to  be  issued  to  the  war-ravaged  countries,  who  would  redis- 
count them  and  secure  funds  immediately. 

'"Hibbert  Journal,  July,  1919. 

"  Vanderlip,  F.  A.,  What  Happened  to  Europe.     Macmillan's,  1919. 


INTERNATIONAL    LOANS  645 

(d)   Proposals  of  Delacroix  and  Pigou — 

The  plans  submitted  by  M.  Delacroix,  Belgian  Prime  Minister 
and  Minister  of  Finance,  and  Professor  A.  C.  Pigou,  of  England, 
are  similar  in  type.  The  scheme  of  M.  Delacroix  provided  for 
the  establishment  of  an  international  bank,  which  would  issue 
interest-bearing  gold  bonds  in  exchange  for  pledged  securities.  All 
states  would  be  represented  on  the  board  of  directors,  which  would 
decide  whether  the  securities  offered  were  satisfactory  and  whether 
the  borrowing  state  could  furnish  adequate  guarantees.  With 
these  world  bonds  the  borrowing  countries  could  obtain  im- 
mediately funds  for  the  purchase  of  essential  goods.  The  security 
offered  might  be  the  customs  duties  of  the  government  or  the 
mineral  or  farm  products  of  the  country,  or  any  source  of  revenue 
whereby  the  bonds  might  be  redeemed. ^^ 

Professor  A.  C.  Pigou  quoted  with  approval  the  plan  of  M. 
Delacroix,  for  the  issue  by  an  international  authority  of  bonds 
secured  by  the  collateral  of  the  borrowing  government  and  guaran- 
teed by  the  international  authority.  The  borrowing  government 
would  sell  these  bonds  to  the  public  at  the  market  price.  How- 
ever, Professor  Pigou  would  impose  several  conditions.  The 
criteria  justifying  loans  would  be  the  urgency  of  need  in  case  of 
loans  for  purposes  of  consumption,  and  the  profitableness  of  the 
enterprise  in  the  case  of  loans  for  purposes  of  production.  The 
borrowing  country  must  not  export  capital  in  any  form.  It  must 
control  foreign  exchange  transactions  and  check  luxury  imports. 
It  must  sell  its  goods  at  world  prices,  otherwise  in  cases  of  greatly 
depreciated  exchange  the  borrowing  country  would  be  wasting  its 
resources.^^  Again,  the  borrowing  government  must  not  use  the 
borrowed  funds  for  military  purposes.  It  must  balance  its  budget 
and  cease  inflating  its  currency.  Finally,  the  loans  would  be  in 
gold  and  not  in  depreciated  paper,  and  if  held  by  foreigners  would 
have  to  be  exempt  from  taxation  in  the  borrowing  country,  and 


"International  Financial  Conference,  Brussels,  1920,  Paper  XII  (1), 
Proposal  for  the  Establishment  of  an  International  Bank,  pp.  3-12.  See 
also  Verbatim  Report  of  the  Debates,  Vol.  II,  pp.  108-114. 

"It  is  interesting  to  note  that  Professor  Cassel  takes  precisely  the 
opposite  view.  He  would  remove  all  forms  of  government  interference, 
particularly  artificial  control  of  export  prices,  because  of  the  resulting 
abnormal  deviation  of  foreign  exchange  and  the  impediment  to  its 
stabilization. 


646        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

rank  in  priority  ahead  of  other  debts  of  the  borrowing  govern- 
ment." 

(e)   Proposals  of  Thalbitzer  and  Vissering — 

M.  Carl  Thalbitzer,  a  Danish  financial  authority  and  editor 
of  Finans  Tidende,  proposed  a  scheme  which  involved  both  barter 
and  refining  credits,  as  well  as  an  international  bank,  international 
bonds,  and  an  international  unit  of  account.^^  The  possibilities  of 
barter  were  limited  to  cases,  in  which  both  countries  could  recip- 
rocally fill  each  other's  needs.  Refining  credits  might  afford  a  less 
narrow  solution.  In  fact,  the  veredelungsverkehr,  or  refining  trade 
was  for  years  an  established  form  of  traffic  between  Belgium  or 
Switzerland  and  the  large  neighboring  countries,  except  that  before 
the  war  payments  for  the  refining  or  finishing  process  were  in 
drafts  and  under  the  post-war  form  payment  was  in  raw  materials. 

However,  Thalbitzer's  main  proposal  was  for  the  establishment 
of  a  double  system  of  clearing  houses,  one  of  which  would  develop 
international  trade  by  means  of  barter  and  refining  credits  and 
the  other  would  create  a  new  financial  standard  for  the  settlement 
of  international  accounts.  The  whole  scheme  would  be  under  the 
direction  of  the  League  of  Nations.  The  clearing  house  for  goods 
would  receive  reports  from  the  several  governments  stating  both 
their  needs  for  goods  and  their  surplus.  In  case  of  a  world  short- 
age the  League  of  Nations  would  provide  for  rationing.  By  this 
means  the  exchange  of  goods  could  be  effected  without  the  issue 
of  credits.  In  order  to  effect  a  settlement  an  international  unit 
of  account  would  be  necessary.  For  this  purpose  and  also  to 
facilitate  the  granting  of  credit  a  Bank  of  the  League  of  Nations 
would  be  established.  Its  principle  function  would  be  to  maintain 
in  relation  to  gold  the  par  value  of  the  international  unit  of 
account,  the  league,  somewhat  similar  to  the  Chinese  tael,  the  bank 
florin  of  the  Amsterdamsche  Wisselbank,  or  the  mark  banco  of 
the  old  Bank  of  Hamburg.  In  addition,  the  Bank  would  issue 
international  bonds  free  from  interest,  payable  in  the  unit  of 
account,  and  finally  would  grant  credit  by  means  of  these  bonds 
on  the  recommendations  of  the  commodities  clearing  house.     As 

"International  Financial  Conference,  Paper  XIII    (4),  pp.  3-7. 

"International  Financial  Conference,  Paper  XII  (6),  The  Interna- 
tional Financial  Problem,  pp.  30-35.  The  Economic  Review,  July  16, 
1920. 


INTERNATIONAL     LOANS  647 

with  the  bank  proposed  by  Delacroix,  the  capital  would  be  con- 
tributed by  the  several  countries,  in  proportion  to  population  or 
national  wealth,  and  would  be  payable  in  cash  or  in  instalments, 
the  contributor  paying  interest  and  amortization  on  the  unpaid 
balance.  However,  against  the  unpaid  balance  the  Bank  might 
issue  bonds  free  from  interest  and  for  which  all  the  states  would 
be  jointly  and  severally  liable. 

The  proposal  of  Dr.  G.  Vissering,  President  of  the  Bank  of 
the  Netherlands,  is  somewhat  similar  to  the  Thalbitzer  scheme,  in 
that  he  advocates  the  organization  of  barter  institutes  or  com- 
modity clearing  houses,  the  creation  of  a  new  unit  of  account  to 
avoid  the  vagaries  of  exchange,  and  international  cooperation  for 
granting  large  credits. 

Both  the  Thalbitzer  and  the  Vissering  plans  would  involve 
unnecessary  government  interference.  Instead  of  setting  off  the 
formidable  lists  of  goods  required  and  of  surplus  available,  the 
same  results  could  be  obtained  without  any  international  machin- 
ery by  a  national  syotem  of  priority  certificates  for  imports,  the 
control  of  export  prices,  and  the  earmarking  of  exports  for  the 
payment  of  imports.^® 

li.  Private  Loans 

The  fundamental  difficulty  of  the  proposals  listed  above  is 
that  they  require  too  large  a  capital,  that  government  inter- 
ference is  involved,  that  a  povi^erful  international  authority  is  essen- 
tial, and  that  there  is  no  close  relation  between  the  time  and 
amount  of  the  credit  needs  of  the  borrower  and  the  raising  of  the 
sums  by  the  lender. 

(a)    The  Views  of  Professor  Cassel — 

Professor  Cassel  indicates  additional  difficulties.  The  problem 
of  reconstruction  is  primarily  a  revival  of  work  within  the  impover- 
ished country,  and  means  the  restoration  of  order,  of  hard  work, 
of  industrial  organization,  and  of  private  enterprise.  Only  until 
exports  can  be  developed  adequately  to  furnish  food  and  raw 
materials,  is  it  necessary  to  draw  upon  foreign  credit.  Interna- 
tional loans  can  only  be  made  from  daily  savings  in  the  lending 

"Vissering,  G.,  International  Economic  and  Financial  Problems. 
London:    Macmillan,  1920. 


648       INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

country  and  not  from  its  accumulations  of  capital.  Therefore, 
ideas  of  huge  world  loans  must  be  abandoned.  International  loans 
must  be  limited  to  financing  the  current  excess  of  exports  from  the 
lending  to  the  borrowing  country.  Capital  is  scarce  the  world  over, 
and  interest  rates  are  high  in  all  countries,  except  where  an  artifi- 
cial money  market  is  maintained.  Therefore  for  an  additional 
reason  the  amounts  of  foreign  loans  must  be  limited  to  current 
savings.  Demands  for  goods  or  credit  must  be  reduced  and  pro- 
rated on  some  principle  of  priority.  Only  the  most  urgent  needs 
of  reconstruction  or  the  most  immediately  remunerative  enterprises 
can  be  financed. ^^ 

As  conditions  to  these  private  loans,  guarantees  must  be  pro- 
vided that  the  money  will  not  be  spent  for  military  purposes  but 
for  productive  uses,  that  new  money  will  have  priority  over  repara- 
tions claims  or  other  obligations.  The  indemnity  must  be  fixed 
within  the  capacity  of  Germany  to  pay,  otherwise  Germany  is  a 
poor  business  risk,  thinks  Professor  Cassel.  Finally,  the  proposal 
to  discount  the  indemnity  bonds  he  believes  to  be  vicious,  for  it 
would  make  the  investor  of  new  money  a  partner  in  collecting  a 
questionable  claim.  If  the  indemnity-paying  powers  are  bankrupt 
their  name  does  not  strengthen  an  obligation.  No  lender  would 
voluntarily  undertake  to  be  the  partner  or  executor  of  a  bankrupt. 

(b)   Proposal  of  Lehner — 

A  strong  defense  of  the  private  loan  as  against  the  government 
loan  was  made  by  Herr  A.  Lehner,  of  Germany.^^  During  the 
war  state  control  and  nationalization  were  extensively  applied,  and 
as  a  result  the  post-war  problems  were  approached  in  the  hope  of 
state  help.  International  loans  are  necessary  only  to  defer  pay- 
ments for  the  excess  of  imports.  The  furnishing  of  adequate 
guarantees  is  the  basic  principle  of  Lehner's  proposal.  Using  the 
analog}'  of  cooperative  credit  among  small  artisans,  who  are  able 
jointly  to  obtain  credit  beyond  the  attainments  of  the  individual, 
Lehner  advocated  the  formation  of  a  Giro-Zentral-Bank,  a  coopera- 
tive clearing  bank,  supported  by  manufacturers,  traders  and  banks 
in  both  lending  and  borrowing  countries.  The  security  of  this 
cooperative  credit  society  would  be  not  merely  the  capital  of  the 

"International   Financial   Conference,   Paper  XIII    (3),   pp.  42-45. 
"International    Financial    Conference,    Paper   XII    (lo),    A    Proposal 
for  the  Solution  of  the  Exchange   Problem,  pp.  70-77. 


INTERNATIONAL    LOANS  649 

banks  but  the  credit  behind  the  bank,  namely  the  raw  material  of 

the  industries,  the  stock  of  finished  goods  and  the  real  estate.  The 
excess  of  imports  would  be  temporarily  funded  by  a  loan  in  the 
exporting  country  which  would  be  secured  by  the  capital  of  the 
proposed  clearing  banks  of  the  lending  country,  by  debentures 
covered  by  the  collateral  of  the  exporters  of  raw  materials,  the 
capital  of  the  German  central  clearing  bank,  and  the  entire  assets 
of  the  cooperating  commercial  and  industrial  interests  supporting 
the  German  central  clearing  bank. 


D.  The  Ter-Meulen-Bruins  Plan 

One  of  the  most  important  practical  results  of  the  Brussels 
Financial  Conference  was  the  perfecting  of  the  Ter-Meulen  scheme 
for  the  granting  of  private  credits  according  to  the  usual  trade 
practice,  but  backed  by  unquestionable  security.  The  Ter-Meulen 
plan,  in  a  tentative  form,  was  included  as  part  of  the  resolutions 
unanimously  adopted  by  the  Conference,  and  in  the  final  form 
was  approved  by  the  Provisional  Economic  and  Financial  Com- 
mittee of  the  League  of  Nations. 

i.  Bruins'  Outline 

The  theoretical  basis  of  the  Ter-Meulen  scheme  was  presented 
by  Dr.  G.  W.  J.  Bruins  in  a  paper  prepared  before  the  date  of 
the  Conference.^^ 

(a)   Criticism — 

Bruins  pointed  out  the  weakness  inherent  in  the  proposals  for 
large  international  loans,  and  for  government  loans  of  any  size. 
A  powerful  international  organization  would  have  to  be  established 
to  handle  inter-government  loans.  The  raising  of  funds  by  lend- 
ing governments  would  increase  inflation.  If  the  United  States 
did  not  join  in  further  inflating  the  currency,  the  depreciation  of 
foreign  currencies  in  terms  of  the  dollar  would  continue.  Again, 
the  international  authority  would  have  the  task  of  ascertaining  in 
which  cases  and  in  which  forms  credits  should  be  granted. 
Extensive  investigation  would  be  necessary,  decision  would  rest 

"'International  Financial  Conference,  Paper  XIII  (2),  pp.  16-24. 


650        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

in  the  hands  of  government  officials,  and  the  approval  of  an  inter- 
national authority  would  be  required  for  the  basis  and  priority  of 
distribution  between  the  applicant  countries,  as  vrell  as  for  the 
specific  guarantees  to  be  required.  An  elaborate  organization,  a 
large  staff,  expensive  maintenance  and  bureaucratic  delays  would 
render  international  loans  of  doubtful  feasibility. 

(b)   The  Conditions  of  Loans — 

As  a  fundamental  condition  for  any  loan,  Dr.  Bruins,  like  the 
'other  economists  of  the  Conference,  insisted  that  the  borrowing 
countries  check  inflation,  and  restore  order  in  their  currency  and 
exchange.  Again,  reconstruction  credits  must  have  priority  over 
outstanding  international  obligations.  It  is  a  general  principle 
of  law  that  claims  arising  out  of  assistance  to  an  insolvent  and 
enabling  him  to  restore  his  solvency,  have  a  priority  over  obliga- 
tions previously  incurred.  The  indemnity  must  be  fixed  within 
the  capacity  of  Germany  to  pay  and  the  assets  already  pledged 
for  the  obligations  due  under  the  peace  treaty  must  be  modified. 
Credits  must  be  limited  to  productive  purposes,  and  must  be  given 
on  a  commercial  basis. 

(c)   Private  Credits — 

Of  the  several  forms  of  private  credit  which  would  be  avail- 
able, Bruins  mentions  "finishing  credits,"  but  points  out  their 
limitations.  If  the  interval  between  the  receipt  of  the  raw  material 
in  the  impoverished  country  and  the  return  of  the  finished  goods 
is  brief,  there  is  no  large  risk,  particularly  because  the  cost  of 
production  in  those  countries  is  under  the  international  level. 
Finishing  credits  are  capable  of  wider  extension  if  cooperative 
groups  of  borrowers  organize  and  enjoy  banking  support.  But 
even  at  best  refining  credit  cannot  be  adequate  in  scope  to  the 
needs  of  international  trade.  For  since  the  end  of  the  war  Europe 
has  suffered  from  under-consumption  and  the  countries  of  supply 
of  raw  materials  have  been  glutted  by  overproduction.  The  cj'cle 
of  international  trade  is  at  a  "deadpoint."  An  impetus  is  neces- 
sary to  initiate  the  international  movement  of  goods.  Europe  can- 
not immediately  pay  in  goods  and  must  therefore  have  credit,  in 
order  that  it  may  be  able  to  pay  later.  During  the  two  years 
after  the  signing  of  the  armistice,  the  problem  was  ever  present, 
but  the  emphasis  was  shifted.    In  igig  buyers  urged  international 


INTERNATIONAL     LOANS  65 1 

credits,  but  sellers  were  busy  filling  the  demands  deferred  during 
the  war.  In  1920  and  1921  the  sellers  who  were  choked  with 
their  redundant  supplies  sought  credit  to  move  their  goods. 

(d)   Bruins'  Plan — 

Any  plan  of  private  credits  must  insure  that  the  guarantees 
are  adequate  to  cover  the  extraordinary  risks.  According  to  one 
proposal  the  individual  buyer  or  borrower  would  be  replaced  by 
an  organization  covering  the  whole  trade  or  industry,  all  the 
members  of  which  would  be  jointly  liable.  This  organization  could 
at  the  same  time  effect  the  distribution  of  imported  materials  among 
Its  constituent  plants.  Prior  liens  in  favor  of  the  new  credits  and 
special  trustee  institutions  to  protect  the  title  of  the  foreign 
exporter  in  the  goods  would  be  necessary.  However,  Bruins  points 
out  that  even  if  the  government  assumed  an  additional  liability 
as  guarantor,  yet  the  general  risks,  political  and  otherwise,  would 
aflEect  the  government  of  the  borrowers  and  involve  their  specific 
guarantees.  Guarantees  free  from  this  difficulty  would  be  prop- 
erty or  assets  outside  the  borrowing  country,  such  as  customs  duties, 
although  these  too  would  be  somewhat  subject  to  the  above  risks. 

In  the  extension  of  credit,  private  enterprise  would  have  to  be 
unrestricted.  Yet  some  international  supervision  would  be  indis- 
pensable, for  the  very  pledge  of  government  assets  or  revenue 
would  imply  that  there  was  to  be  a  trustee,  necessarily  an  inter- 
national authority,  to  guard  the  rights  of  both  lenders  and  bor- 
rowers and  at  the  same  time  to  avoid  preempting  certain  sources 
of  income  in  favor  of  particular  creditors.  Under  a  scheme  of 
unrestricted  private  enterprise,  the  relative  profitableness  of  the 
several  propositions  for  which  credit  is  sought  would  effect  an 
automatic  distribution  of  the  funds,  so  that  the  most  pressing  needs 
would  receive  priority.  Nevertheless,  the  approval  of  an  inter- 
national authority  would  be  necessary'  to  determine  the  relative 
importance  of  competing  applications  for  credit.  Again,  credits 
would  have  to  be  granted  on  a  commercial  basis  so  as  to  avoid 
further  inflation.  In  general  outlines,  the  problem  of  method 
would  resolve  itself  into  the  mobilization  of  credits.  In  the  lend- 
ing countries  organizations  of  producers  would  issue  bonds  to  the 
public  or  else  the  international  authority  might  approve  bonds  to 
be  issued  against  national  credits,  under  the  guarantees  deposited 
with  it.     In  brief,  the  principle  of  such  a  plan  of  international 


652        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

cooperation  is  to  put  adequate  guarantees  into  the  hands  of  an 
international  authority,  whose  approval  of  international  credits 
would  be  necessary,  and  at  the  same  time  to  leave  the  arrangement 
of  credits  to  the  private  borrowers  and  lenders.  Of  course,  the 
strength  of  the  system  lies  in  its  strictly  commercial  character. 
Therefore  non-remunerative  and  yet  necessary  enterprises,  such  as 
restoring  transport  and  communication,  would  be  neglected.  How- 
ever, for  such  general  reconstruction  purposes  some  supplementary 
form  of  credits  would  have  to  be  provided. 


ii.  The  Ter-Meulen  Plan 

(a)   Sumiiiary  and  Text — 

A  tentative  draft  of  the  Ter-Meulen  plan  was  submitted  as  an 
appendix  to  the  unanimously  adopted  resolutions  of  the  Commit- 
tee on  International  Credits  of  the  Brussels  Financial  Conference. 
After  slight  amendments  a  final  text  was  drafted.  The  underlying 
idea  of  the  Ter-Meulen  plan  is  that  the  various  governments  shall 
specify  which  assets,  based  on  assured  revenue,  they  are  ready  to 
pledge,  that  an  international  authority  shall  determine  the  gold 
value  of  the  assigned  assets,  and  that  the  government  shall  then 
issue  bonds  up  to  this  amount,  which  it  shall  lend  to  its  nationals. 
The  importer  who  borrowed  these  bonds  for  collateral  would 
nevertheless  be  free  to  arrange  any  terms  of  credit  with  the  foreign 
exporter.  The  terms  of  the  private  credit  would  not  need  to  cor- 
respond, however,  with  the  government  bonds  themselves  either 
as  to  rate  of  interest  or  maturity.  Loans  would  be  made  for  pro- 
ductive purposes  only  and  their  character  as  essential  and  prefer- 
ably self-liquidating  imports  would  have  to  be  approved  by  the 
International  Commission. 

The  government  loans  would  be  used  only  as  collateral.  Then 
if  the  private  credit  was  paid,  the  bonds  would  be  returned  to  the 
issuing  government.  If  the  credit  was  not  paid,  the  issuing  govern- 
ment would  have  the  right  to  pay  it  instead,  withdraw  its  bonds 
and  look  to  its  national  for  reimbursement.  If  it  failed  to  pay  the 
matured  credit  the  exporter  might  hold  the  government  bonds  to 
maturity  or  sell  them,  deduct  his  claim  against  the  private  importer, 
and  return  the  balance  to  the  issuing  government.  The  exporter 
would  rarely  have  to  sell  the  bonds  of  the  government  of  the 


INTERNATIONAL    LOANS  653 

importer,  because  the  relation  between  the  yield  of  the  pledged 
revenues  and  the  total  bonds  outstanding  at  any  time  would  permit 
the  redemption  within  a  few  months  of  all  the  bonds  then  out- 
standing. Even  if  importers  should  default  in  such  large  num- 
bers that  the  government  could  not  redeem  at  maturity  all  the 
bonds  then  outstanding,  the  pledged  revenues  would  serve  as  col- 
lateral for  a  new  loan,  the  proceeds  of  which  could  be  used  to 
refund  the  balance  of  the  then  outstanding  bonds. 

In  view  oi"  the  fact  that  the  proportions  of  the  private  bor- 
rowings in  the  several  countries  would  be  changing  continually, 
and  since  the  pledged  revenues  would  be  devoted  to  a  sinking  fund, 
the  International  Commission  would  have  to  buy  and  sell  exchange 
on  a  large  scale.  Since  the  pledged  revenues  would  be  in  gold 
and  the  bonds  would  perhaps  be  in  paper  currency,  there  would 
have  to  be  a  large  margin  to  guard  against  the  depreciation  of 
exchange.  Again,  the  revenues  assigned  to  the  International  Com- 
mission might  be  larger  than  the  sums  needed  for  payment  of 
interest,  sinking  fund,  and  redemption  of  collateral  on  private 
credits  in  default.  In  other  words,  the  government  of  the  bor- 
rowing nationals  would  be  temporarily  deprived  of  a  portion  of 
its  budget  revenue.  The  immobilization  of  part  of  the  govern- 
ment revenue  would  increase  in  proportion  with  the  credits  to  be 
secured. 

To  avoid  the  Invasion  of  the  rights  of  any  government  pro- 
visions are  made  to  safeguard  the  sovereign  rights  of  the  govern- 
ments involved.    The  text  follows: 

1.  In  order  that  impoverished  nations,  which  under  present 
circumstances  are  unable  to  obtain  accommodations  on  reasonable 
terras  in  the  open  market,  may  be  able  to  command  the  confidence 
necessary  to  attract  funds  for  the  financing  of  their  essential  imports, 
an  International  Commission  shall  be  constiuted  under  the  auspices 
of   the    League    of    Nations. 

2.  The  Commission  shall  consist  of  bankers  and  business  men 
of  international  repute,  appointed  by  the  Council  of  the  League  of 
Nations,  and  shall  have  discretion  to  appoint  agents  and  sub-com- 
missions and  to  devolve  upon  them  the  exercise  of  its  functions. 

3.  The  governments  of  countries  desiring  to  participate  shall 
notify  the  Commission  what  specific  assets  they  are  prepared  to 
assign  as  security  for  commercial  credits  to  be  granted  by  the 
nationals  of  exporting  countries. 

4.  The  Commission  after  examination  of  these  assets,  shall  de- 
termine the  gold  value  of  the  credits  which  it  would  approve 
against  the  security  of  these  assets. 

5.  The    participating   governments    shall    then    be    authorized    to 


654        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

issue  bonds  (o  the  gold  value  approved  by  the  Commission.  The 
bonds  shall  be  in  such  form,  -with  such  date  of  maturity  and  rate 
of  interest,  as  the  Commission  may  decide  and  shall,  in  particular, 
enumerate  the  assets  pledged  against  the  bonds.  The  denomination 
of  each  bond  and  the  specific  currency  in  which  it  is  to  be  issued 
shall  be  determined  by  the  participating  government  in  agreement 
with  the  Commission,  in  accordance  with  the  conditions  applicable 
to  the  particular  transactions  in  respect  of  which  they  are  issued. 

6.  The  service  of  these  bonds,  which  will  be  obligations  of  the 
issuing  government,  shall  be  specifically  secured  out  of  the  revenue 
of  the   assigned   assets. 

7.  The  assigned  assets  shall  be  administered  by  the  participating 
government  or  by  the  International  Commission  as  a  majority  of 
the  Council  of  the  League  of  Nations  may  determine  on  the  pro- 
posal of  the  International  Commission.  Nevertheless,  in  cases  where 
the  administration  of  the  assigned  assets  is  in  the  hands  of  the 
participating  government,  the  International  Commission  at  any  time 
may,  and  in  the  event  of  default  shall,  require  the  participating 
government  to  transfer  the  administration  of  the  assets  to  itself. 

The  participating  government  shall  have  the  right  to  appeal  to 
the  Council  of  the  League  of  Nations  against  this  requirement,  and 
the  decision  of  the  Council  of  the  League  of  Nations  on  these  ques- 
tions shall  be  binding.^" 

8.  The  revenues  from  the  assigned  assets  shall  be  applied  as 
follows  to  the  service  of  the  bonds: 

(i)  Out  of  these  revenues  the  Commission  shall  purchase  am 
hold,  or  the  participating  government  shall  satisfy  the  Commission 
that  it  has  purchased  and  holds,  foreign  currencies  sufficient  to 
provide — 

(a)  Cover  for  the  coupons  falling  due  in  the  next  j'car  of  all 
bonds  at  any  time  outstanding  in  each  of  such  currencies. 

(b)  A  sinking  fund  calculated  to  redeem  at  maturity  10  per  cent 
of  the  bonds  outstanding  in   each  of  the  different  countries. 

(c)  A  reserve  in  such  foreign  currency  or  currencies  as  the 
International  Commission  may  determine  for  the  redemption  of 
any  bonds  sold  in  accordance  with  paragraph  16. 

20  On  this  section  (No.  7),  tne  ProxTsional  Economic  and  Financial  Committee  on  the 
Council  of  the  Lea<;ue  of  Nations  made  the  following  comment: 

This  article  contemplates  that  m  certain  eventualities  the  Council  shall  take  responsibility 
with  regard  to  the  transfer  of  the  administration  of  the  assigned  assets  from  the  participating 
governments  to  the  International  Commission. 

Countries  exposed  by  the  weakness  of  their  credit  to  onerous  conditions  and  exacting  demands, 
iwill  thus  secure  an  impartial  tribunal  to  protect  them.  They  will  find  in  it  a  support  when 
dealing  with  their  creditors  and  bein'^  relieved  of  any  fear  of  unfair  poh'tical  pressure  they 
could  readily  accept  methods  of  administration  which  would  not,  as  in  the  case  of  certain  "Debt 
Councils,"  threaten  an  encroachment  on  their  sovereign  rights;  these  sovereign  rights  would 
remain  under  the  protection  of  the  Council  of  the  League  of  Nations.  Being  thus  able,  Tvithout 
misgivings,  to  offer  to  lenders  adequate  guarantees  they  should  be  in  a  position  to  borrow  on 
more  reasonable  terms  than  would  otherwise  be  the  case. 

There  are  many  details  of  administration  on  which  we  have  not  felt  competent  to  lay  down 
definite  proposals  for  procedure  and  these  remaining  questions  must  be  dealt  with  by  the 
officials  ultimately  appointed  to  carry  out  the  scheme. 

The  question  has  arisen  at  many  points  of  our  discussion  how  far  the  League,  by  setting  up 
the  International  Commission,  contemplated  in  the  scheme,  would  be  considered  to  involve 
Itself  in  any  financial  or  other  guarantee  against  losses  by  the  parties  concerned. 

^Ye  recogn'ze  that  the  Council,  if  it  adopts  the  plan,  will  be  under  a  moral  obligation  to 
provide  such  reasonable  safeguards  as  are  in  its  power,  but  we  think  that  it  should  be  made  quite 
clear  both  en  the  bonds  themselves  and  otherwise  that  in  setting  up  the  machinery  contem- 
plated under  the  scheme,  the  League  in  no  way  commits  itself  to  a.ny  financial  or  administrative 
guarantees  and  assumes  no  liability  whatever  in  respect  of  any  losses  which  may  occur. 


INTERNATIONAL     LOANS  655 

(11)  Any  surplus  remaining  after  the  provision  of  these  services 
shall  be  at  the  free  disposal  of  the  participating  government. 

9.  The  participating  government  will  be  free  either  to  pledge 
its  own  bonds  as  collateral  for  credits  for  approved  imports  on  its 
own  account  or  to  lend  the  bonds  to  its  nationals  as  collateral  for 
credits  for  appro-ved  imports  on  private  account,  and  for  the  latter 
purpose  will  be  free  to  fix  such  terras  including  the  security,  if  any, 
to  be  given,  as  it  may  think  fit. 

These   terms   shall    be   communicated    to   the    Commission.      The 
bonds  shall  not  be  used  for  any  other  purposes  than  those  specified 
,  in  this  clause."' 

10.  Each  bond  shall  before  issue  be  countersigned  by  the  Com- 
mission in  proof  of  registration. 

11.  The  fundamental  purpose  of  the  scheme  being  to  facilitate 
and  expedite  the  import  of  raw  materials  and  primary  necessaries 
as  well  as  enable  the  borrowing  countries  to  reestablish  production 
especially  for  export,  bonds  secured  on  the  assigned  assets  shall  not 
be  utilized  as  collateral  for  credits  for  the  import  of  other  com- 
modities, provided  that  where  the  Commission  is  satisfied  that  the 
import  of  such  other  commodities  will  assist  in  securing  the  above 
purpose,  it  shall  have  the  discretion  to  permit  special  exceptions  to 
the  above  rule  subject  to  such  conditions  as  it  may  think  fit. 

12.  For  each  borrowing  country  the  Commission  will  draw  up, 
in  consultation  with  the  participating  government,  a  schedule  of 
approved  imports  which  will  be  regarded  as  falling  within  the 
definition  of  raw  materials  and  primary  necessaries. 

13.  Particulars  of  each  transaction  must  be  registered  with  the 
Commission,  which,  before  countersigning  a  registered  bond,  will 
satisfy  itself  that  the  credit  is  for  an  apprcved  import  and  that  the 
period  for  which  it  is  proposed  to  be  granted  is  a  reasonable  one. 

14.  The  same  conditions  as  govern  the  pledge  of  its  bonds  as 
collateral  for  credits  for  imports  on  private  account  shall  apply  in 
cases  where  the  participating  government  pledges  its  own  bonds 
as  collateral  for  imports  on  government  account. 

15.  After  having  received  bonds  duly  countersigned,  the  importer 
will   pledge  them  with  the  exporter. 

16.  Pledged  bonds  shall  be  dealt  with  as  follows: 

(a)  In  the  absence  of  any  failure  by  the  importer  to  fulfil  his 
contract  with  the  exporter,  the  coupons  on  their  due  date,  and  the 
bonds  as  they  are  released  shall  be  returned  to  the  importer  who 
shall   return  them  to  his  government  forthwith. 

(b)  In  the  event  of  the  importer  not  fulfilling  the  terms  of  his 
contract,  the  exporter   (or  his  assigns)   may  either  hold  the  bonds 

"I  The  tentative  draft  as  originally  presented  amplified  this  section,  as  follows: 

After  the  preparation  of  these  bonds  the  participating  government  shall  have  the  right 
to  loan  the  bonds  to  its  own  nationals,  for  use  by  them  as  collateral  security  for  importations. 

The  participating  government  shall  be  free  to  take  or  not  to  take  security  for  the  loan  of 
these  bonds  from  the  nationals  to  v/hom  they  are  lent. 

The  maturity  and  the  rale  of  interest  of  the  loan  of  the  bonds  shall  be  fixed  by  agreement 
between  the  participating  government  and  the  borrower  of  the  bonds;  they  need  not  be  the 
same  as  the  maturity  and  the  rate  of  interest  of  the  bonds  themselves. 

When  making  application  to  his  government  for  a  loan  of  these  bonds,  the  importer  must 
furnish  proof  that  he  has  previously  obtained  from  the  International  Commission  express 
permission  to  enter  into  the  transaction  for  which  the  bonds  are  to  be  given  as  collateral. 

Having  obtained  the  consent  of  the  Commission  and  received  from  them  the  countersigned 
bonds,  the  importer  will  pledge  these  bonds  to  the  exporter  in  a  foreign  country  for  the  period 
of  the  transaction. 


656        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

until  maturity,  or  if  he  prefers  he  may,  at  any  time,  sell  them  in 
accordance  with  the  laws  and  customs  of  his  country,  providing 
that  before  the  bonds  are  sold  a  reasonable  opportunity  shall  be 
given  to  the  issuing  government  to  repurchase  them  by  paying  to 
the  exporter  the  amount  of  his  claim.  The  proceeds  of  such  sale 
shall  be  applied  by  the  exporter  towards  covering  his  claims  against 
the  importer.  Any  surplus  not  required  for  this  purpose  shall  be 
accounted  for  by  the  exporter  to  the  participating  government. 

(c)  Any  coupons  or  bonds  returned  to  the  participating  govern- 
ment or  purchased  by  such  government  shall  be  forthwith  canceled 
in  accordance  with  the  regulations  to  be  prescribed  by  the  Inter- 
national Commission;  canceled  bonds  may  subsequently  with  the 
approval  of  the  Commission  be  replaced  by  other  bonds  either  in 
the  same  or  in  a  different  currency,  in  accordance  with  the  con- 
ditions governing  the  original  issue  of  bonds. 

(b)  Recommendations — 

The  Economic  and  Financial  Committee  of  the  Council  of  the 
League  of  Nations  strongly  recommended  a  test  of  the  Ter-Meulen 
plan,  because  it  alone  held  out  a  fair  promise  of  success  in  meeting 
the  acute  international  credit  situation.  Yet  haste  was  ti.  be  avoided 
and  the  scheme  slowly  developed.  A  business  man  was  to  act  as 
Organizer  of  International  Credits;  his  prime  task  would  be  to 
determine  the  extent  to  which  the  Ter-Meulen  scheme  could  be 
linked  with  the  existing  services  in  the  several  countries,  and  to 
find  out  to  what  extent  the  borrowing  countries  would  be  willing 
to  avail  themselves  of  this  plan.  Until  this  investigation  should 
warrant  the  creation  of  a  large  organization,  the  organizer  himself 
would  temporarily  assume  the  duties  of  the  contemplated  inter- 
national commission. 

Sir  Drummond  Fraser,  the  author  of  the  plan  of  continuous 
issue  of  war  bonds  (or  the  so-called  Drummond  Fraser  Plan  of 
day-to-day  borrowing)  was  appointed  organizer  of  the  Ter-Meulen 
plan  of  international  credits.^- 

(c)  Limitations  of  the  Scheme — 

As  Dr.  Bruins  pointed  out  the  Ter-Meulen  plan  does  not  pro- 
vide for  necessary  public  works,  which  are  essential  for  the  con- 
duct of  private  enterprise  but  which  nevertheless  are  not  so 
remunerative.  Furthermore,  the  Ter-Meulen  plan  provides  no 
help  for  states  such  as  France  or  Italy,  which  are  not  so  lacking  in 
credit  as  to  submit  to  the  administration  of  their  assets  or  revenues 

^London  dispatch,  Mar.  S,  1921. 


INTERNATIONAL     LOANS  657 

or  for  States  such  as  Poland  which  are  poor  enough  but  may  be 
too  proud  to  do  so.  Again,  some  states  have  no  assets  available, 
either  because  of  poverty  or  through  the  priority  of  reparation 
claims.  For  the  former  class,  the  existing  limited  mechanism  of 
international  credit  would  have  to  suffice,  in  spite  of  its  limitations. 
For  the  latter,  some  assistance  might  be  provided  under  the  inter- 
national relief  credits  organization.  Nevertheless,  in  a  large  range 
of  operations  the  Ter-Meulen  scheme  should  work,  for  the  limita- 
tion of  credit  to  productive  enterprise  and  the  guarantee  by  the 
self-liquidating  obligations  of  the  government  of  the  importer 
would  undoubtedly  induce  exporters  to  grant  credit  in  cases  where 
they  would  hesitate  to  lend  on  the  credit  of  the  private  borrower 
only.  Of  course,  if  the  government  of  the  borrowers  did  not 
enter  into  the  transaction  in  good  faith,  it  would  require  inter- 
national coercion  to  effect  a  just  settlement.  However,  only  a  test 
will  afford  basis  for  a  sound  judgment  of  the  scheme.^^ 

(d)   An  Appraisal  of  the  Ter-Meulen  Plan — 

The  Ter-Meulen  scheme  is  not  pretentious.  It  is  modest  in  its 
purpose  and  narrow  in  its  scope.  It  does  not  aim  to  stabilize  the 
exchanges  nor  does  it  contemplate  discounting  the  indemnities.  It 
does  not  involve  huge  sums  nor  does  it  attempt  immediately  to 
remedy  all  the  ills  of  Europe.  It  depends  primarily  upon  existing 
facilities  of  international  credit.  Even  in  requiring  the  guarantee 
of  the  government  of  the  borrower,  the  Ter-Meulen  plan  does 
not  call  for  the  pledging  of  a  large  part  of  the  national  assets  or 
revenues.  These  are  furnished  only  to  an  extent  sufficient  to  cover 
approved  private  loans.  As  a  result  the  lenders  do  not  have  to 
raise  large  sums  in  excess  of  the  capacity  to  save  of  the  investors 
in  their  country,  nor  do  the  borrowing  governments  suddenly 
obtain  huge  sums  of  money  which  they  are  likely  to  misuse. 

The  Ter-Meulen  scheme  provides  guarantees  which  will  inspire 
the  exporter  with  confidence,  yet  it  does  not  release  him  from  the 
necessity  of  inspecting  his  credit  risks  carefully. 

'"London  Economist,  Oct.  23,  1930. 


CHAPTER  XX 


NEW  YORK  AND  LONDON  AS  FINANCIAL  CENTERS 


During  the  days  of  the  Italian  republics  and  the  overland 
route  to  Asia,  Venice  was  the  center  of  the  business  world.  The 
discovery  of  America  made  the  Mediterranean  routes  of  minor 
importance  and  conferred  financial  preeminence  upon  Spain.  Dur- 
ing the  era  of  colonial  expansion  Holland  for  a  time  occupied  a 
dominant  position  in  the  commercial  and  financial  world.  As  a 
result  of  the  Napoleonic  Wars  England  wrested  the  financial 
supremacy  from  France.  The  World  War  has  affected  the  rela- 
tive positions  of  New  York  and  London,  The  extent  of  this 
change  is  the  subject  of  this  chapter. 

A.  Before  the  War 
i.  Geographical  Position 
The  financial  supremacy  of  London  in  international  finance 
was  based  on  many  factors.  Great  Britain,  completely  surrounded 
by  water  and  situated  off  the  most  densely  populated  continent  of 
the  world,  is  destined  by  nature  to  be  a  seafaring  and  trading 
nation  preeminently.  Geographically  London  occupies  the  posi- 
tion that  Venice  and  Constantinople  did  in  former  commercial 
eras.  It  is  a  focus  of  trade  routes  of  the  world.  On  the  other 
hand,  New  York  lies  remote  from  many  lanes  of  trade.  London 
is  the  gateway  to  Europe  and  Asia,  whereas  New  York  at  best  can 
be  the  commercial  center  for  the  Americas  only.  This  fundamental 
fact  has  not  been  greatly  altered  by  the  war. 

Relatfve  Population  of  the  Continents  ^ 


Area 

(thousand 

square  miles) 


Population 
(in  millions) 


Population 

per 
'square  mile 


Europe 

Asia 

Africa 

North  America 
South  America 


3,873 

17,206 

11,622 

8,589 

7,570 


464.7 

872. 5 

142.8 

140.0 

56.3 


120.0 

50- 7 

12.3 

16.3 

7-4 


^National   Geographical   Society. 

658 


NEW    YORK    AND    LONDON    AS    FINANCIAL    CENTERS 


659 


The  population  of  Europe  is  more  than  three  times  that  of  North 
America  and  the  population  of  Europe  and  Asia  combined  is  more 
than  six  times  that  of  the  Americas.  Apparently  so  long  as  the 
relative  populations  of  the  continents  do  not  greatly  change  con- 
ditions favor  the  continuation  of  London  as  the  world's  leading 
trade  center. 

A  comparison  of  the  distances  from  London  and  from  New 
York  to  important  overseas  points  shows  the  greater  proximity 
of  London. 


To  Port  of 


From  London,* 
Miles 


From  New  York.f 
Miles 


Odessa . . . 
Port  Said. 
Natal 


Bombay. . . . 

Gibraltar. .  . 
Calcutta .  .  . 

Hong  Kong. 

Yokohama . . 
Manila 


Melbourne . 


Pemambuco . 
Buenos  Aires. 


Valparaiso . 
Havana .  .  . 


3,410 
3,248 
6,810 

6,330 

1,325 
7,795 

9,900 

11,245 
9,750 

11,250 

4,130 
6,280 


8,870 
4,100 


5,370 

5,122 

6,815 

8,i2c  (via  Suez) 
11,250  (via  Cape  of  Good  Hope 

3,207 

9,830 

11,430  (\aa  Panama) 
11,610  (\aa  Suez) 

9,243  (via  Honolulu) 
11,546 

12,880  (via  Cape  Horn) 
12,670  (via  Cape  of  Good  Hope) 
10,028  (via  Panama) 

3,696 

5,868 

4,637  (via  Panama) 
8,460  (via  Cape  Horn) 
1,227 


*  Shipping  World  Year  Book. 

t  Statistical  Abstract,  Navy  Department  records. 

The  comparison  of  the  shipping  distances  indicates  that  London 
is  much  closer  to  the  densely  populated  sections  of  the  world. 
Even  in  distance  from  the  east  coast  of  South  America  and  from 
Australia  London  is  not  at  a  great  disadvantage  compared  to  New 
York.  New  York  has  the  advantage  of  proximity  only  in  trade 
with  Central  America,  and  the  west  coast  of  South  America,  via 
Panama. 

n.  Industrial  Maturity 

Great   Britain   has   attained   industrial   maturity  whereas   the 
United    States  has   not.     Great   Britain    imports   food   and   raw 


660        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

material  and  exports  manufactured  goods.  It  is  highly  industrial- 
ized. The  United  States  still  is  partly  in  the  agricultural  stage, 
both  because  of  the  relative  sparsity  of  population  and  because  of 
the  incomplete  development  of  her  natural  resources.  As  a  result 
of  her  industrial  maturity  Great  Britain  has  adopted  a  policy  of 
free  trade.  In  the  absence  of  a  tariff  there  are  no  restrictions  and 
impediments  on  the  movement  of  foreign  merchandise.  London  is 
the  greatest  market  for  consigned  merchandise  in  the  world.  In 
London  every  commodity  in  the  world,  practically,  may  be  bought 
and  sold.  The  heavy  coal  exports  make  possible  the  imports  of 
bulky  raw  materials.  The  routes  of  liners  and  tramp  steamers 
radiate  from  London  to  every  corner  of  the  globe.  Because  of 
Great  Britain's  industrial  maturity  the  rate  of  return  on  domestic 
investments  has  been  low,  and  British  funds  have  therefore  been 
invested  abroad  to  take  advantage  of  the  higher  rates.  As  a  result 
of  the  industrial  saturation  of  Great  Britain  the  funds  of  her 
nationals  have  been  invested  in  practically  every  country,  and  these 
investments  have  often  taken  the  form  of  the  exportation  of  British 
capital  goods,  such  as  rails,  structural  steel,  and  transportation 
and  industrial  equipment.  Further,  as  a  result  of  her  industrial 
maturity  she  has  not  been  able  to  direct  the  annual  increase  of 
her  population  to  the  further  development  of  her  resources  but 
has  had  to  export  it.  The  peopling  of  the  British  Dominions  with 
stock  from  the  British  Isles  has  created  an  overseas  demand  for 
British  merchandise,  and  out  of  the  surplus  population  trained 
men  have  been  recruited  for  foreign  trade  and  the  commercial 
and  diplomatic  services. 

iii.    Transshipment  Trade 

An  important  element  in  the  financial  primacy  of  London  is 
the  huge  volume  of  British  foreign  trade.  The  total  trade  of  the 
United  Kingdom  during  19 1 3  amounted  to  $6331  million  while 
that  of  the  United  States  was  only  $4276  million.  British  trade 
was  not  only  larger  in  amount  but  involved  more  foreign  countries 
than  did  that  of  the  United  States.  As  a  result  almost  every 
country  in  the  world  had  to  make  sterling  remittances  to  pay  for 
British  exports.  Therefore  sterling  bills  had  a  wider  market  than 
any  others.  In  fact,  British  bills  were  used  in  the  settlement  of 
trade    balances    between    non-British    countries,    as    between    the 


NEW   YORK   AND    LONDON    AS    FINANCIAL    CENTERS 


66l 


United  States  and  China.  Fully  half  the  amount  of  sterling  bills 
that  came  to  London  represented  the  financing  of  non-British 
trade.-  However,  even  before  the  war  the  federalization  of  trade 
and  finance  was  gradually  taking  place.  Half  a  century  ago 
settlements  between  New  York  and  Bremen  were  made  in  British 
exchange.^  But  as  the  function  of  London  as  the  international 
jobber  diminished  and  direct  trade  between  the  developing  non- 
British  countries  increased  the  financing  of  trade  was  accomplished 
in  growing  measure  independently  of  Great  Britain. 

The  importance  of  London  as  a  center  of  trade  and  transship- 
ment has  been  due  largely  to  the  service  of  the  British  merchant 
marine.  In  1914  British  steam,  tonnage  was  41.7  per  cent  of  the 
world's  total.  The  merchant  marine  has  been  reinforced  by  the 
most  powerful  navy  in  the  world,  and  by  the  possession  of  harbors 
and  coal  and  oil  fueling  stations  at  the  strategic  trade  positions 
throughout  the  world. 

iv.  Financial  Facilities 


As  a  result  of  the  geographical,  industrial  and  commercial  fac- 
tors Great  Britain  has  developed  financial  facilities  for  handling 
the  world's  trade.  For  this  service  she  has  enjoyed  a  great  initial 
advantage  in  that  the  British  Empire  produces  over  60  per  cent  of 
the  world's  gold. 

Gold  Production  of  the  World  * 


Year 

Transvaal. 
Per   cent 

British  Empire. 
Per  cent 

World  production. 
Million  dollars 

1913 
1919 

39- 5 
47-3 

60.2 
66.0 

460 
36s 

The  possession  of  the  source  of  supply  of  the  major  part  of  the 

world's  gold  production  has  made  it  possible  to  maintain  a  free 
gold  market  in  London,  and  to  keep  sterling  at  mint  parity.    Thus 

'Wyse,  Robert  C,  Future  of  London  as  the  World's  Money  Market 
The  Economic  Journal,  December,  1918,  p.  389. 

'Goshen,  Theory  of  the  Foreign  Exchanges,  i6th  Edition,  1894,  p.  34. 
Lawson,  W.  R.,  British  Economics  in  1904,  p.  226.  Conant,  C.  A.,  History 
of  Modern  Banks  of  Issue,  p.  136,  5th  Edition. 

*  Statesman's  Year  Book,  192a 


662        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

the  world  has  had  an  international  currency  which  was  unfluctuat- 
ing, freely  convertible  into  gold,  and  acceptable  everj^where. 
Therefore  foreign  countries  have  stated  their  prices  in  sterling 
and  have  drawn  on  London,  Even  in  trade  between  non-British 
countries  the  British  acceptor  has  furnished  the  media  of  pay- 
ment. Tea  shipped  :'^rom  China  to  New  York  would  be  paid  for 
by  drafts  of  the  exporter  on  a  London  bank  against  the  account 
of  the  American  importer.  The  Chinese  exporter  would  receive 
the  price  which  his  bill  commanded  in  London  and  the  London 
acceptor  would  turn  to  the  New  York  importer  for  pa3'ment.^ 

For  the  handling  of  trade  and  finance,  London  possesses  un- 
rivalled facilities,  including  the  British  banks  and  banking  houses, 
the  Anglo-foreign  banks,  the  insurance  companies,  and  the  London 
Stock  Exchange,  on  which  are  listed  securities  from  almost  every 
quarter  of  the  globe.  The  British  Stock  Exchange  list  resembles 
a  geography  index.  Loans  to  countries,  cities,  railroads,  utilities 
and  industries  are  made  in  overseas  countries  and  on  all  the  con- 
tinents. 

The  financial  machinery  of  London  consists  of  acceptance 
houses,  discount  houses,  bill  brokers,  joint-stock  banks,  and  the 
Bank  of  England.  Before  the  war,  the  Bank  of  England  main- 
tained its  machinery  and  kept  sterling  near  mint  parity  by  changes 
in  the  discount  rate.  The  existence  of  a  broad  and  international 
market  for  long  and  short-term  investments  and  of  a  flexible  dis- 
count rate  enabled  London  to  maintain  financial  supremacy.  The 
extent  and  steadiness  of  the  London  money  market  made  it  the 
world's  reservoir  of  credit. 


v.  Political  and  Other  Factors 

Not  the  least  element  in  the  financial  primacy  of  London  is 
its  position  as  the  capital  of  the  greatest  empire  of  the  world.  The 
financing  of  British  and  colonial  trade  alone  would  make  London 
the  most  important  financial  city.  Added  to  this  fact  Is  the  inter- 
national outlook  of  the  British  merchant,  banker,  and  government 
ofl'icial.  The  British  business  mind  is  cosmopolitan.  Having  fully 
developed  "the  tight  little  Isle,"  It  looks  toward  the  sea  and  the 

'  Goshen,  p.  30,  ei  seq. 


NEW    YORK    AND    LONDON    AS    FINANCIAL    CENTERS  663 

distant  lands.  It  thinks  in  terms  of  continents.  This  international- 
mindedness  is  evident  in  the  facility  with  which  both  British 
capital  and  British  man  power  move  from  one  foreign  country  to 
another.  The  British  mind  is  primarily  the  mind  of  the  trader 
and  the  developer  of  natural  resources  and  it  has  an  orientation 
that  cuts  across  political  boundaries.  Finally,  Great  Britain  has 
the  advantage  of  being  the  pioneer  in  the  field  of  international 
trade  and  finance.  As  a  result  trade  lanes  have  been  established, 
financial  methods  have  become  fixed,  and  the  minds  of  the  traders 
of  the  world  have  become  accustomed  to  a  regime  in  which  London 
is  the  dominating  factor.  The  City  has  maintained  this  position 
because  of  a  liberal  fiscal  policy,  an  adaptable  banking  system,  and 
the  unsullied  reputation  of  British  merchants  and  financiers  for 
honesty  and  faith-keeping. 


B.  During  the  War*' 

The  events  of  the  war  indicated  that  London  was  apparently 
losing  this  traditional  position.  With  respect  to  the  British 
merchant  marine,  the  jobbing  trade,  and  financial  power,  the  eco- 
nomic conditions  created  by  the  war  seemed  unfavorable  to  the 
continued  maintenance,  unchallenged,  of  the  preeminence  of 
London. 

i.   The  Decline  of  the  Jobbing  Trade 

The  operation  of  the  submarine  in  the  Mediterranean  shifted 
the  trade  route  to  the  Orient,  from  the  Mediterranean  to  the 
Pacific.  North  and  South  America  traded  directly  with  over- 
seas countries.  The  Panama  Canal  permitted  a  juncture  between 
the  Asiatic  ports  and  the  American  Atlantic  coastal  cities.  The 
shortage  of  shipping  compelled  the  most  efficient  routing,  which 
frequently  was  not  via  Europe.'^  Tin  from  the  Straits  came  to 
American  ports  directly  instead  of  via  London.  Tobacco  from 
Sumatra  was  imported  directly  by  the  United  States  instead  via 
Rotterdam.    Tea  was  routed  across  the  Pacific  to  America  instead 

'Lansburgh,  Alfred,  Die  Ausschaltung  London's  als  Clearlnghaus  der 
Welt     Die  Bank,  October,  1014,  pp.  903-920. 

'  See  the  author's  International  Commerce  and  Reconstruction,  pp.  74- 
76,  and  p.  158. 


664 


INTERNATIONAL   FINANCE   AND   ITS   REORGANIZATION 


of  via  Europe.    The  decline  of  the  jobbing  trade  of  Great  Britain 
is  strikingly  indicated  in  the  following  table: 

Export  of  Foreign  and  Colonial  Merchandisb 


Year 

Value 

in  millions  sterling 

1913 

109.6 

1914 

95-5 

191S 

99.1 

1915 

97  6 

1917 

69.7 

1918 

31.0 

In  the  year  191 8  the  transshipment  trade  of  Great  Britain  declined 
to  28  per  cent  of  the  pre-war  figure.  To  some  it  seemed  that 
London  had  resigned  the  function  of  international  jobber. 

ii.   The  Decline  in  Shipping 

According  to  Lloyd's  Register,  the  decline  of  the  steam  tonnage 
of  the  United  Kingdom  from  June,  19 14,  to  June,  1920,  was 
5,497,000  tons.  On  the  other  hand,  the  steam  tonnage  of  the 
United  States  increased  10,379,000  and  the  net  increase  of  the 
entire  world  amounted  to  8,501,000.  Of  the  seagoing  steam  ton- 
nage afloat  in  191 4,  43.9  per  cent  belonged  to  Great  Britain 
and  4.7  per  cent  to  the  United  States,  and  in  1920,  35.1  per  cent 
belonged  to  Great  Britain  and  24.0  per  cent  to  the  United  States.** 
During  the  war  the  rise  in  prestige  of  non-British  shipping  at  the 
expense  of  the  British  seemed  to  indicate  a  decline  in  the  focal 
position  of  London  in  international  trade. 

iii.  Foreign  Exchange  Arbitrage 

As  was  explained  in  the  section  on  foreign  exchange  in  the 
United  States,  there  was  a  great  increase  during  the  war  in  deal- 
ings between  the  United  States  and  other  countries.  Before  the 
war  American  dealers  conducted  arbitrage  operations  with  only 
the  three  leading  commercial  countries  of  Europe,  but  during  tke 
war  with  practically  every  country  of  the  world.     Furthermore, 

'London  Economist,  July  31,  1920,  p.  183.  Also  Lloyd's  Register, 
and  the  Bureau  Veritas  Repertoire  Generale. 


NEW  YORK  AND  LONDON  AS  FINANCIAL   CENTERS  665 

the  dollar  accounts  of  foreign  banking  institutions  in  the  United 
States  increased  in  activity  greatly,  representing  transactions  with 
Asia,  the  Americas,  and  the  neutral  European  countries. 

However,  the  importance  of  the  pound  sterling  was  statistically 
indicated  during  the  war.  Of  the  total  arbitrage  operations  Great 
Britain  figured  as  the  most  important  country.  During  the  entire 
period  of  the  regulation  of  foreign  exchange  from  February  20, 
1 91 8,  to  June  25,  1919,  the  total  purchases  and  sales  of  demand 
and  cable  exchange  between  "dealers"  in  the  United  States  were 
$9981  million,  of  which  $6883  million,  or  about  69  per  cent, 
covered  exchange  on  Great  Britain.  Of  the  total  arbitrage  opera- 
tions of  the  United  States  during  this  period.  Great  Britain  was 
involved  in  considerably  over  50  per  cent.  Of  the  foreign  exchange 
purchases  of  other  countries  by  the  United  States,  amounting  to 
1607  million,  $905  million,  or  about  56  per  cent,  were  in  exchange 
on  Great  Britain.  Of  the  foreign  exchange  sold  to  other  countries 
by  the  United  States,  amounting  to  $1296  million,  about  $928 
million  or  72  per  cent  was  in  exchange  on  Great  Britain.  The 
importance  of  Great  Britain  in  the  purchase  and  sale  of  dollars 
jfor  foreign  account  is  also  clearly  indicated. 

The  importance  of  sterling  is  likewise  evident  in  the  purchase 
and  sale  of  non-British  currency  by  Great  Britain,  The  extensive 
sale  of  Dutch  guilders,  Norwegian  and  Swedish  kroner,  Spanish 
pesetas,  and  Swiss  francs  by  Great  Britain,  has  been  treated  in 
the  section  on  foreign  exchange  in  the  United  States.^ 

In  spite  of  the  w^ar  it  seems  that  the  preeminence  of  Great 
Britain  in  foreign  exchange  operations  was  maintained : 


iv.   The  Federal  Reserve  System  and  the  American  Acceptance 

Market 

Since  the  establishment  of  the  Federal  Reserve  System,  just 
prior  to  the  war,  a  market  for  acceptances  has  grown  in  the  United 
States.  The  acceptances  bought  in  the  open  market  by  the  Federal 
Reserve  banks  rose  from  $65  million  in  1915  to  $2825  million  in 
1919,  as  follows  :^° 

"Report  of  the  Federal  Reserve  Board,  1918,  pp.  53,  56;  1919,  p.  47. 
^"Annual  Report  of  the  Federal  Reserve  Board,  1919,  p.  21. 


666 


INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 


Million  dollars 

I9I5 

I9I6 

I9I7 
I9I7 
I9I9 

6S 

386 

909 

1809 

2825 

Similarly  the  trade  acceptances  discounted  by  the  Federal  Reserve 
banks  increased  from  $37.7  million  in  191 7  to  $187.4  million  in 
1918." 

An  estimate  of  the  acceptance  liabilities  of  member  banks  on 
May  4,  1920,  amounted  to  $678  million,  and  the  amount  of  bankers' 
acceptances  growing  out  of  domestic  and  foreign  trade  transactions 
held  by  the  Federal  Reserve  banks  in  June,  1 920,  amounted  to 
$412  million/^ 

The  growth  of  acceptances  in  the  New  York  district  likewise 
indicates  progress.  The  outstanding  acceptances  of  member  banks 
in  the  New  York  district  grew  as  follows: 


]\Iillion  dollars 

September,  1916 

September,  191 7 

September,  1918 

December,  1919 

115. 6 
172-5 
275-8 
335-7 

The  total  volume  of  bankers'  acceptances  and  foreign  trade  bills 
in  dollars  drawn  on  American  merchants  at  the  end  of  19 19  was 
estimated  at  more  than  $1000  million. 

The  amount  of  the  acceptances  of  foreign-trade  banks  and 
acceptance  corporations  in  New  York  on  December  31,  1919,  was 
over  $90  million,  and  the  capital  and  surplus  of  these  institutions 
amounted  to  almost  $39  million.^^ 

In  comparison,  the  acceptances  of  groups  of  the  leading  banks 
of  Europe,  constituting  a  large  part  of  the  total  acceptances  out- 

"  Annual  Report  of  the  Federal  Reserve  Board,  1919,  pp.  181-184. 
^*  Federal  Reserve  Bulletin,  July,  1920,  p.  666. 

"Annual   Report   of   the   Federal   Reserve   Bank   of   New  York,    1919, 
p.  19. 


NEW    YORE   AND   LONDON   AS    FINANCIAL   CENTERS  667 

Standing  in  each  country,  are  of  interest.  The  acceptances  of  the 
30  leading  banks  of  Great  Britain  at  the  end  of  1913,  1918,  and 
1919,  amounted  to  $191  million,  $302  million,  and  $772  million, 
respectively.  The  acceptances  of  the  three  leading  banks  of  France 
outstanding  at  the  end  of  191 3  were  $98  million  and  of  the  eight 
leading  banks  of  Germany  at  the  same  date,  $319  million.^*  The 
growth  of  acceptances  in  the  United  States  has  been  hindered  by 
the  absorption  of  short-time  funds  to  treasury  certificates  of  indebt- 
edness, and  by  the  demands  of  the  stock  market.  The  introduction 
of  term  settlements  such  as  is  customary  on  the  stock  exchanges  in 
Europe, ^^  may  reduce  the  stock-market  demands  for  call  funds, 
and  thus  permit  the  development  of  an  acceptance  market.  The 
ultimate  retirement  of  the  government  floating  debt  will  likewise 
release  large  amounts  of  liquid  funds  which  will  be  available  for 
investment  in  acceptances. 

v.  The  Depreciation  of  Sterling 

The  suspension  of  specie  payment  at  the  beginning  of  the  war, 
the  restriction  on  gold  shipments  from  London,  and  other  factors, 
discussed  elsewhere  in  this  book,  resulted  in  a  depreciation  of 
sterling.  A  depreciated  rate  is  necessarily  unstable.  As  a  result 
of  the  war  London  has  for  the  time  being  lost  the  supreme  advan- 
tage of  an  unfluctuating  standard,  which  was  suitable  as  an  inter- 
national medium  of  settlement  of  foreign-trade  transactions.  Dis- 
count rates  were  effective  before  the  war  in  regulating  the  gold 
flow  and  in  maintaining  the  stability  of  sterling.  An  attempt  was 
made  during  the  war  to  attract  foreign  funds  by  granting  a  pref- 
erential rate  of  interest  on  foreign  balances.^*"'  However,  when 
the  fluctuations  in  exchange  are  wide  and  violent,  a  fractional  rise 
in  the  rate  of  interest  does  not  compensate  for  the  risks  of  great 
losses.  Therefore  the  device  was  not  effective  and  was  abandoned. 
Before  the  war  London's  discount  rate  acted  like  the  governor 
of  a  steam  engine,  and  automatically  and  accurately  adjusted  the 
exchange  rates.     Temporarily  at  least  London  has  resigned  her 

"  Federal  Reserve  Bulletin,  April,  1920,  p.  374.  See  also  estimates  by 
Leopold  Frederick  of  acceptances  outstanding  in  London  and  New  York. 
ibid.,  January,  1919,  pp.  21-22. 

"  Suggested  by  Mr,  Paul  M.  Warburg  in  a  statement  to  the  American 
Acceptance  Council. 

"  For  a  discussion  of  this  subject  see  the  chapter  on  the  British 
Foreign  Exchange. 


668        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

financial  supremacy  rs  the  controller  and  regulator  of  gold  move- 
ments and  international  exchanges. 

vi.   Other  Financial  Factors 

However,  in  some  respects  London  still  maintains  the  machinery 
necessary  for  the  resumption  of  her  pre-war  position.  It  is  true 
that  as  a  result  of  the  war  the  British  investors  liquidated  a  large 
part  of  their  holdings  of  American  securities.  But  because  of  the 
rather  parochial  character  of  the  New  York  Stock  Exchange  list, 
they  were  unable  to  sell  in  New  York  the  British  holdings  of  many 
other  than  American  securities.  Great  Britain  still  retains  about 
$15,000  million  of  foreign  investments.  The  British  colonial 
securities  were  not  even  mobilized  and  of  the  non-British  invest- 
ments there  still  remain  many  South  American  and  other  neutral 
securities. 

The  reversal  of  America's  financial  position  from  that  of  a 
debtor  to  that  of  a  creditor  will  tend  to  raise  the  financial  prestige 
of  New  York,  but  will  not  react  to  the  injury  of  London's  pre- 
eminent position.  Even  if  the  Allied  debt  should  not  be  paid  in 
full,  America  will  still  be  a  creditor  nation  and  will  therefore  have 
an  annual  invisible  credit  balance  which  it  may  offset  by  goods 
or  by  further  foreign  investments.  To  the  extent  that  America 
builds  up  large  holdings  of  foreign  securities  she  will  develop  one 
of  the  prerequisites  for  becoming  an  important  financial  center. 
However,  until  the  New  York  investment  list  becomes  as  inclusive 
as  that  of  London,  the  international  supremacy  of  London  will  not 
be  seriously  challenged. 

C.  After  the  War 

With  few  exceptions,  the  factors  which  made  London  the  bank- 
ing center  of  the  world  again  became  operative  after  the  war.  The 
place  of  Germany  was  taken  in  part  by  the  United  States.  London 
is  still  the  focus  of  the  trade  routes  of  the  world,  and  still  the 
gateway  to  the  most  densely  populated  of  the  continents. 

i.   The  Restoration  of  Commercial  Prestige 

Although  the  war  hastened  the  industrialization  of  countries, 
which  were  cut  ofiF  from  Europe,  the  source  of  supply  of  finished 


NEW    YORK   AND    LONDON   AS   FINANCIAL    CENTERS 


669 


goods,  yet  the  European  countries,  and  England  particularly,  will 
continue  for  a  long  time  to  furnish  manufactures  to  the  undeveloped 
countries,  the  source  of  supply  of  raw  materials.  The  function  of 
London  as  a  transshipping  center  was  again  in  evidence  during 
191 9  and  1920.  The  value  of  the  exports  of  foreign  and  colonial 
merchandise  in  1920  was  more  than  twice  that  of  19 13,  and  more 
than  seven  times  that  of  191 8. 


Millions  sterling 

I9I3 
I9I8 
I9I9 
1920 

109.6 

310 

164.7 

222.4 

The  comparison  between  the  returns  for  19 18  and  1920  shows  the 
rebound  from  war  conditions.  The  comparison  with  191 3  must 
take  into  account  the  inflation  of  prices. 

Not  only  did  the  transshipment  trade  of  Great  Britain  greatly 
increase  after  the  war,  but  the  exports  of  home  production  like- 
wise increased.  The  exports  of  British  goods  in  191 3  amounted 
to  525  millions  sterling  and  in  1920  to  1336  millions.  The  imports 
in  1913  amounted  to  769  millions  sterling  and  in  1920  to  1937 
millions.  The  great  increase  in  trade  in  both  domestic  and  foreign 
goods  was  due  to  the  dependence  of  Europe  upon  Great  Britain, 
owing  to  the  strength  of  British  credit  and  the  weakness  of  the 
credit  of  the  Continental  countries.  Furthermore,  foreign  trade 
is  more  essential  to  the  industrial  life  of  Great  Britain  than  to  that 
of  the  United  States,  and  the  British  have  made  vigorous  efforts 
to  retrieve  their  pre-war  position. 

Although  the  United  States  has  greatly  increased  her  shipping 
tonnage  and  the  capacity  of  her  shipyards,  yet  there  is  serious  ques- 
tion whether  she  will  be  able  to  maintain  an  independent  ship- 
building industry  and  a  merchant  marine  competitive  with  those 
of  Great  Britain.  The  seafaring  bent,  an  adequate  trained  person- 
nel, incidental  facilities,  and  commercial  tradition  are  but  a  few 
of  the  factors  which  will  help  to  restore  British  preeminence  in 
the  shipping  world.  By  dint  of  the  recently  effected  combination 
of  American  capital  and  German  experience,  the  American 
merchant  marine  may  attain  a  position  somewhat  analogous  to 
that  held  by  Germany  before  the  war. 


670        INTERNATIONAL    FINANCE    AND   ITS    REORGANIZATION 


ii.  Restoration  of  Financial  Prestige 

Among  the  difficulties  in  the  way  of  the  reestablishment  of 
the  supremacy  of  London  are  the  depreciation  of  sterling,  the 
existence  of  a  gold  embargo,  and  the  absence  of  a  free  gold  market. 
On  the  other  hand,  New  York  is  the  only  large  free  gold  market 
of  the  world  and  the  dollar  is  not  depreciated  in  any  important 
financial  center.  As  a  result  the  quotations  governing  the  silver 
markets  of  the  world  are  now  established  also  in  New  York  rather 
than  in  London  alone,  as  before  the  war.  The  London  quotation 
for  silver  fluctuates  in  sympathy  with  the  exchange  rate  of  the 
dollar  in  London. ^'^ 

Nevertheless,  London  has  not  abdicated  its  financial  position. 
With  respect  to  most  of  the  European  countries  the  pound  sterling 
is  at  a  premium  and  fairly  constant.  After  the  war  London 
became  the  banker  for  the  Continent.  British  merchants  purchased 
goods  from  the  United  States  on  short-term  credit  and  sold  to 
Continental  merchants  on  long-term  credit.  London  bought  up 
the  supply  of  franc,  lira  and  other  exchanges  in  the  United  States 
and  furnished  the  Continental  countries  with  dollars.  Therefore, 
there  is  no  wide  market  for  the  Continental  exchanges  in  New 
York.  On  the  other  hand,  the  sterling  rate  has  been  artificially 
depressed  in  much  the  same  way  that  the  dollar  was  depressed 
during  the  war  as  a  result  of  the  "pegging"  of  the  European 
exchanges.  London  not  only  exported  goods  to  the  Continent, 
but  it  also  made  loans,  or  invested  in  Continental  properties,  and 
bought  up  Continental  holdings  of  neutral  securities.  These  factors 
tended  at  the  time  to  depreciate  sterling. 

The  preeminent  position  of  London  has  been  further  reinforced. 
In  anticipation  of  enlarged  demands  for  British  credit,  the  banks 
of  London  amalgamated  on  a  large  scale  and  strengthened  their 
organizations.^^  In  sddtion  to  furnishing  short-term  credit  and 
strengthening  her  facilities  with  this  end  in  view.  Great  Britain 
remained  a  large  market  for  the  flotation  of  international  securi- 
ties.    By  contrast,  except  for  the  listing  of  Cuban,  Mexican  and 

"Report  of  Consul  General  George  E.  Anderson,  Hongkong,  March 
2,  1920.  Annual  Review  of  the  Hongkong  and  Shanghai  Banking  Cor- 
poration,   Feb.   28,    1920. 

"Commerce  Reports,  Dec.  29,  1917;  Feb.  i,  Mar.  2,  Apr.  i,  June 
25   and  Aug.  9,   1918. 


NEW    YORK    AND    LONDON    AS    FINANCIAL    CENTERS  67 1 

a  few  Other  Latin  American  securities,  the  New  York  market  has 
not  the  international  character  possessed  bj"  the  London  Stock 
Exchange.  As  an  example  of  the  efforts  of  the  London  bankers 
to  retain  their  financial  prestige,  the  British  government  under- 
took to  pay  the  Argentine  loan  maturing  in  New  York  on  May 
15,  1920,  and  borrowed  funds  in  the  United  States  for  this  purpose. 
The  New  York  bankers  refused  to  renew  the  loan  because  Argen- 
tina at  the  time  was  drawing  gold  from  the  United  States  in 
settlement  of  her  excess  of  exports. 

London  remains  the  international  financial  center  because  Great 
Britain  still  has  about  $15,000  million  of  foreign  investments  dis- 
tributed in  all  parts  of  the  world.  True,  as  was  shown  above,  in 
the  section  on  British  foreign  exchange,  the  restriction  of  capital 
issues  during  the  war,  the  prohibition  on  the  exportation  of  capital, 
and  the  domestic  requirements  for  capital  for  undertakings  deferred 
during  the  war,  caused  a  decrease  relatively  in  the  issue  of  foreign 
securities  and  an  increase  in  the  issue  of  home  investments.  The 
lack  of  capital  in  England  may  for  some  time  reduce  the  flotation 
of  overseas  securities  in  the  London  market.  For  example,  in  the 
average  of  the  three  years  from  19 12  to  19 14  about  20  per  cent  of 
the  total  British  issues  were  for  domestic  purposes.  But  in  1920 
the  amount  was  88  per  cent. 

But  it  is  hardly  likely  that  London  will  be  supplanted  as  the 
world's  market  for  the  issue  of  international  securities.  The  rela- 
tively high  rate  of  interest  paid  on  domestic  investments  in  the 
United  States,  the  lack  of  familiarity  of  the  American  investor 
with  foreign  securities  and  his  preference  for  home  investments, 
and  the  lack  of  colonies  and  of  existing  overseas  investments  are 
a  few  of  the  factors  which  will  prevent  New  York  from  supplant- 
ing London  as  the  world's  investment  center.  Apparently,  then, 
from  the  point  of  view  of  short-term  as  well  as  long-term  credits, 
London  will  probably  retain  her  pre-war  financial  supremacy. 

D.  The  Outlook 

There  seems  to  be  a  little  doubt  in  the  minds  of  bankers  and 
students  of  finance  that  New  York  will  not  replace  London,  but 
there  is  no  doubt  that  New  York  will  take  an  increasingly  impor- 
tant part  in  international  financial  operations.  The  relations 
between  these  two  financial  centers  will  be  characterized  by  a 


672        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

closer  cooperr'tion,  "  a  partnership  of  equals,"  as  it  was  expressed 
by  a  prominent  British  banker.^^ 


i.  Deficiencies  of  London 

Although  London  has  not  surrendered  her  financial  supremacy, 
yet  post-war  London  has  not  the  same  capacity  as  before  the  war 
to  meet  the  world's  needs.  In  order  again  to  do  so  a  credit  balanca 
of  exports  and  imports,  visible  and  invisible,  must  be  obtained  as  a 
prerequisite  for  the  restoration  of  a  free  gold  market  in  London. 
Again,  the  position  of  London  is  conditioned  by  the  pursuit  of  a 
liberal  financial  policy.  Before  the  war  the  acceptances  of  non- 
British  banks  were  discriminated  against.  If  London  is  to  con- 
tinue to  be  the  money  market  of  the  world,  foreign  banks  should 
receive  the  same  opportunity  as  domestic  banks  for  the  performance 
of  legitimate  banking  functions.-"  Only  by  the  maintenance  of  a 
free  and  fair  market  and  by  granting  full  opportunity  to  foreign 
banks  will  London  be  able  to  maintain  her  international  position. 
In  fact,  instead  of  restricting  the  use  of  the  sterling  bill  in  trade 
between  non-British  countries,  London  bankers  after  the  war  will 
have  to  stimulate  this  business  by  the  liberal  treatment  of  the  non- 
British  bank  in  London. 


ii.  Deficiencies  of  New  York 

New  York  lacks  the  machinery  and  the  personnel  essential  to 
become  the  world's  banking  center.  Except  in  Latin  America 
American  banks  establish  foreign  connections  instead  of  their  own 
branches.  As  a  result,  in  spite  of  the  fact  that  the  dollar  is  the 
world's  stable  currency  standard  and  that  there  is  an  increasing 
tendency  all  over  the  world  to  draw  in  dollars  the  facilities  to 
make  this  possible  are  inadequate.  Although  Sir  Edward  Holden 
in  his  address  to  the  stockholders  of  the  London  City  and  Midland 
Bank   (September   14,   191 8)   advocated  cooperation  with  foreign 

"E.  Mackay  Edgar,  London  press,  Aug.  25,  1919,  and  Edgar  Cram- 
mond,  ibid. 

"Wyse,  R.  C,  Future  of  London  as  the  World's  Money  Market, 
Economic  Journal,  December,  1918,  pp.  390-1. 


NEW    YORK    AND    LONDON    AS    FINANCIAL    CENTERS  673 

bankers  instead  of  the  establishment  of  branches  in  competition 
with  them,  there  is  no  doubt  that  the  existing  British  banks  all 
over  the  world  constitute  one  of  the  very  important  reasons  for 
the  extensive  use  of  sterling  in  international  trade,  even  between 
non-British  countries.  The  New  York  banks  will  have  to  establish 
adequate  financial  facilities  in  foreign  countries  if  the  dollar  is 
to  become  a  popular  instrument  in  international  trade. 

Furthermore,  New  York  must  develop  a  market  for  inter- 
national acceptances.  The  demand  for  short-time  funds,  for  the 
government  certificates  of  indebtedness,  and  for  stock-exchange  call 
loans  has  checked  the  growth  of  a  market  for  foreign  acceptances 
in  New  York.  Both  these  obstacles  should  ultimately  be  removed. 
Again,  New  York  lacks  a  wide  market  for  foreign  securities,  par- 
ticularly industrial  securities,  although  as  a  result  of  the  war  this 
shortcoming  has  been  partially  overcome.  True,  most  of  the  foreign 
securities  floated  in  New  York  since  191 4  are  government  rather 
than  industrial  loans.  The  few  outstanding  exceptions  are  the 
Royal  Dutch,  "Shell,"  De  Beers,  and  Rand  shares.  The  increas- 
ing familiarity  wnth  foreign  securities  upon  the  part  of  the  American 
investor  should  make  the  New  York  Stock  Exchange  list  as  inter- 
national as  was  that  of  London  or  Amsterdam  before  the  war. 

In  personnel,  New  York  has  another  great  handicap  compared 
with  London  or  any  of  the  European  cities.  There  the  dense 
population  has  compelled  the  exportation  of  surplus  man  power. 
Trained  men  returning  from  foreign  parts  to  the  banks  of  Europe 
have  brought  with  them  first-hand  knowledge,  which  is  essential 
for  the  financing  of  overseas  business.  Again,  the  presence  of  many 
nations  in  Europe  on  an  area  approximately  equal  to  that  of  the 
United  States  has  created  an  international  outlook  which  is  lack- 
ing in  the  United  States.  These  deficiencies  are  not  so  easily 
overcome  as  the  others.  It  will  be  many  years  before  our  popula- 
tion will  be  as  dense  as  that  of  Europe  and  before  the  incentive 
to  migration  to  foreign  parts  will  be  as  compelling.  Furthermore, 
the  industrial  immaturity  of  the  United  States  and  the  existence 
of  large  undeveloped  resources  has  retained  the  energy  and  capital 
of  Americans  within  the  country.  The  prevalence  of  high  rates 
of  interest  at  home  is  not  an  incentive  to  export  capital.  In  short, 
the  conditions  that  made  London  the  world's  commercial  and  finan- 
cial center  before  the  war  were  fundamental  and  not  susceptible 
of  being  overturned  during  the  war.     For  this  reason  New  York 


674        INTERNATIONAL    FINANCE    AND    ITS    REORGANIZATION 

cannot  attain  at  present  to  international  financial  leadership.  Her 
functions  will  be  to  participate  more  extensively  in  international 
affairs  and  become  one  of  the  important  foci  in  the  world  of 
finance.^^ 

"  Warburg,  Paul  M.,  Some  Phases  of  Financial  Reconstruction,  Annals 
of  Acad.  Pol.  Soc.  Sci.,  vol.  82,  pp.  347-373,  March,  1919.  The  Nation's 
Business,    January,    1919. 


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France 

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Bulletin  de  la  statistique  generale  de  la  France.     (Quarterly). 

Budget  generale  de  la  France.     (Annual.) 

Expose  de  motifs  du  projet  de  loi   (of  the  revenue  laws).     (Annual.) 

Bulletin  de  statistique  et  de  legislation  comparee.     (Monthly.) 

Ministere  des  finances.     Compte  general  de  I'administration  des  finances. 

2  vols.     (Annual.) 
Renseignements  statistiques  relatifs  aux  contributions  directes  et  aux  taxes 

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Debats  et  documents,  Senat  et  chambre. 

Germany 

Vierteljahreshefte  zur  statistik  des  Deutschen  Reichs.      (Quarterly.) 

Statistisches  Jahrbuch  fiir  das   Deutsche   Reich.      (Annual.) 

Monatliche     Nachweise    iiber     den     auswartigen     Handel     Deutschlands. 

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Reichsbank.      Verwaltungsbericht:   Statistische    Abteilung.      (Annual.) 
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Reichsgesetzblatt. 
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N 


INDEX  OF  AUTHORS 


Adams,  H.  C,  3,  13 

Adams,  T.  S.,   i 

Akira-Den,  446 

Allen,  J.  E.,  485 

Allix,  E.,   109,   131 

Anderson,  B.  M.,  124,  219,  233,  410, 

610 
Anderson,  George  E.,  467,  670 
Anderson,  N.  L.,  477 
Angell,  Norman,  581 
Arbuthnot,  C.  C,  1 
Arnold,  Sydney,  485 
Ay  res,  L.  P.,  33 

B 

Balfour-Brown,  H.,  485 

Ballod,  Karl,  147 

Barger,  M.  S.,  355 

Barker,  J.  Ellis,  19,  24 

Baruch,  B.  M.,  609 

Bastable,  C,  F.,  94,  136,  489,  540 

Beaulieu,  P.  Leroy,  94 

Bendix,  L.,  142,  260,  264,  278,  479 

Bcrgius,  — ,531 

Bernhard,    George,    140,   473,   480, 

517 
Berridge,  S.,  617 
Beusch,  Paul,   517 
Blackett,  B.  P.,  67 
Block,  Jean,  114 
Bogart,  E.  L.,   31,   36,   53,    54,   58, 

219 
Bonn,  M.  J.,  142,  135,  i6t 
Borah,  Senator  W.  E.,  569 
Boret,  Victor,  133 
Bourbeau,  M.,  224,  444 
Bowley,  A.  H.,  427 
Brailsford,  H.  N.,  604,  605 
Brown,  H.  G.,  303 


Bruins,  G.,  620,  621,  642,  649,  650, 

651,  656 
Bullock,   C.  J.,  296,  297,  298,  299, 

329*  354.  362,  610 


CalUaux,  M,,  515 

Campbell-Bannerman,  Premier,  534 
Casenave,  Maurice,  133,  255 
Cassel,  G.,  620,  621,  622,  645,  647, 

648 
Castiereagh,  Lord,  583 
Chamberlin,  Austen,  72,  77,  78,  81, 

408,  421,   502,   512,   513,  552,   555 
Cheron,  Andre,   131 
Churchill,  Winston,   552 
Clapham,  J.  H.,   541 
Cohn,  Gustav,  526 
Conant,   C.  A.,    190,   193,   195,  217, 

222,  258,   586,  661 
Conway,  Sir  Martin,  551 
Crammond,  Edgar,  51,  429 
Cravath,  P.  D.,  608 
Crespi,  Senor,  549 
Crosby,  O.  T.,  546,  547 
Curtis,  James  F.,  67 


Dallas,  Secretary,  ij 
Davenport,  H.  J.,  i,  9,  Z2 
Delacroix,  M.,  645 
Descamps,   M.,   435,  443,   559 
Dernburg,  Bernhard,  157 
Deumer,  R.,  477 
Diehl,  Prof.,  516 
Dietzel,  Heinrich,  512 
Doumer,  Paul,  96,  515,  594 
Dubois,  L.,   53,   128,  589 
Dulles,  J.  F„  605,  609 


691 


692 


INDEX  OF  AUTHORS 


Edgar,  E.  Mackty,  672 

Edgeworth,  F.  Y.,  i 

Edwards,    P.    E.,    Com.    Att.,    477, 

478 
Einaudi,  L.,  521,  549 
Ellis,  — ,   539 
Englander,  Oskar,  280 
Eulenburg,   Franz,  169 


FilHmore,  — ,  534 
Fisk,  Harvey,  £.,  489,  503 
Fraser,   Drummond,   213,   656 
Frederick,  Leopold,  387,  667 
Freund,  — ,  529 


Gallatin,  Secretary,  12,  13 
Gardin,  J.  E.,  615 
Gibson,  H.  A.,  213 
Gide,    Charles,    no,    114,    124,    543, 
547.   549.   576,   601,  620,   621,  644 
Giffen,  Sir  Robert,  428 
Gini,  C,   521 
Girault,  A.,  514 

Glass,   Carter,   541,  555,  577,  638 
Going,  C.  M.,  260,  264 
Gomel,  — ,  93 

Goodenough,  F.  C,  411,  545 
Goschen,  Viscount,  217,  661,  662 
Gothein,  Herr,  516 
Gottlieb,  L,  R.,  31,  36,   58,  179 
Grady,  H.  G,  215 
Grew,  J.  C,  477 
Gifford,  W.  S.,  357 

H 

Haase,  E.,  472 
Harding,  President,   583 
Harding,  W.  P.  G.,  248,  387 
Haristoi,  Just,   514 
Hauser,   Henri,   133 
Havenstein,  Herr,  275 
Heilbrun,  — ,   518 
Helfferich,  Karl,  4,  5,  135,  141 
Henger,  Hans,  432 
Hepburn,  A.  B.,  256,  332 
Herbette,  Jean,   543 
Herring,  C.  E.,  335 
Herriot,  E.,  133 


Hirst,  F.  W.,  90,  94,  136,  485 

Hitchcock,  Senator,   567 

Hobson,  C.  K.,  427,  430,  432,  452, 

485,  605 
Holden,  Sir  Edward,  143,  173,  217, 

270,  672 
Hollander,  Jacob  H.,  i,  304 
Hollis,  Cons.  Gen.,  405 
Hook,  A.,  485 
Home,  Sir  Robert,  551 
Houston,  Davis  F.,  547,  555,  566 
Houston,  R.  P.,  550 


Jacks,  L.  P.,  550 
Jaffe,  Edgar,  4,  517 
Jaranoff,  A.,   434 
Jastrow,   J.,    516 
Jennings,  H.  J.,  156 
Jenny,  Frederic,   601,  617,  638,  639 
Jeze,  Gaston,  33,  58,  in,  116,  134, 
237.  514.  S16,  548 


Kann,  Herbert,  289 

Kemmerer,  E.  W.,   i 

Kent,  F.  I.,  389,  397 

Keynes,  J.  M.,  53,  54,  71,  129,  337, 

451.  551.  563.  567.  568,  588,  589, 

603,  643 
Kirkaidy,  A.  W.,  58,  2ii,  214 
Klotz,   M.,    53,    102,    108,    H7,    130, 

434,   515,  559.  589 
Konietzko,  — ,  518,  519 
Korner,  — ,   529 


Lapradelle,  G.  de,  588 
Lammers,  — ,  276 
Lamont,   Thomas,   W.,   362,   555 
Lansburgh,    Alfred,    171,    175,   250, 

663 
Law,  A.  Bonar,  492 
Lawrence,  F.  W.  Pethick,  485,  494 
Laughlin,  J.  Laurence,   i,  31,   13a, 

137,  219 
Leaf,  Walter,  191 
Lefevre,  Andre,   95,   98 
Leffingweli,  R.  C,  390,  394,  553 
Lehner,   A.,   648 
Levi,  Leone,  539 
Levy,  Raphael-Georges,  232 


INDEX   or  AUTHORS 


693 


Lemis,  F.  W.,  429 

Liesse,    Andre,    99,    104,    235,    260, 

435.  440,   586 
Listoe,  Cons.  Gen.  Soren,  474 
Lloyd     George,     David,     552,     553, 

580,  594,  596,  639 
Loree,  L.   F.,   353 
Loucheur,  M.,  53,  402,  589,  599 
Luzzatti,  Luigi,  549,  615 
Lysis,  223 

M 

Macaulay,  T.  B.,  23 

MacLeod,  H.  D,,  289 

Magniaude,  M.,  515 

Manes,  Albert,  523,  528 

Marshal,   Francois,   117,   131 

Mayer,  A.,  264 

McAdoo,  William  G.,  576 

Mears,  E.   G.,  434 

Meinl,  Herr,  642 

Melchior,  Karl,  171 

Mellon,  A,  W.,  553 

Metin,  Albert,  515 

Meyer,  Eugene,  Jr.,  359 

Mill,  J,  S.,  489,  su 

Mitchell,  W.  C,  182,  186,  209,  244, 

256,  288,  332,  485 
Mitchell,  A.  A,,   503 
Mombert,  Prof.,  473,  517 
Mouwe,  A.  E,,  586 
Munch,  George,  169 

N 

Noyes,  A.  D.,  132 

Noyes,  P.  B.  O.,  544,  564,  365 


Osborne,  A.  A.,  522 
Owen,  Robert,  L.,  387,  389 


Paish,  Sir  George,  295,  296,  297, 
417,  427,  428,   575,  636,  643 

Pantaleoni,  M.,  620,  621 

Patten,  Simon,  N.,   i,  12 

Patten,  K.  S.,  409 

Patterson,   William,    193 

Penrose,  Boies,  578,  579 

Peret,  Raoul,  in,  131,  548 

Pigou,  A.  C,  I.  8,  12,  115,  485, 
493,  620,  621,  622,  645 

Plehn,   Carl   C,   i,   16 


Porter,  G.  R,  427,  539 
Pupin,  Rene,  53,  129,  589 


RaflFalovItch,   A.,   132,  264,   617 

Rathbone,  A.,   554 

Rathenau,   Walther,   168,   169,   599, 

603 
Ribot,  A.,  223,  515,  548 
Ricardo,   D.,  489,  491 
Riesser,  J.,  451 
Roger,  Francis,  514 
Rogers,  J.  E.  Thorold,  5,  6 


Samuel,  Herbert,  87,  485 

Sanbart,  — ,  525 

Say,  Leon,  94,  586 

Sayous,  Andre,   543 

Schaefer,  Karl   U.,  287 

Schiffer,  Dr.,   137,  138,  149 

Schleimes,  Alexis,  167 

Schmidt,  F.,  300 

Schulze,  Bernhard,  461 

Scott,  W.  R.,  1,  15,  485,  529 

Seligman,  E.  R.  A.,   1,  31,   36,  58, 

488 
Seydoux,  M.,  599 
Siepmann,  H.  E.,  617 
Simons,  Dr.,  604 
Simpich,    Frederick,    140,   451,   452, 

456 
Skinner,  Cons.  Gen.,  422 
Smith,  J.  Russel,  612,  613 
Snodgrass,   K,  H.,   58 
Sprague,   O.  M.  W.,   i 
Stamp,  J.   S.,   19,   25,   53,   135,  485, 

502,  546,  565 
Steinberg,  J.,   517 
Stillwell,  E.  A.,   550 
Stourm,  Rene,  93 
Strassny,  — ,  531 
Strauss,   Albert,   390 
Streel,  E.  du  V.,  588 


Taussig,  F.  W.,  304,  612,  613 

Ter   Meulen,  — ,   625 

Thackara,   Cons.   Gen.  A.  M.,  100, 

102,  219,  238,  239,  448 
Thalbitzer,  Carl,  646,   647 
Thery,  Edmond,  547,  548 


694 


INDEX  OF  AUTHORS 


Thiesing,  T.  H.,  366 
Tornquist,  Ernest,  424 
Trouton,   R.,  551 

Tucker,   R.   S.,   296,    329,   347,   354, 
362,  610 


Van  Daehne,  van  Varick,  525 
Vanderlip,  F.  A.,  554,  644 
Vissering,   G.,   647 
Von  Meckel,  — ,  527 

W 

Warburg,  Max  M.,  168,  642 
Warburg,   Paul,    M.,   67,    190,    365, 

667,  674 
Westcott,  C.  D.,  98 


White,  Horace,  249 

White,  Benjamin,  249,  276 

Wickersham,  G.  W.,  554 

Wicksell,  Knut,  457 

Willard,  Ambassador,  424 

Williams,  F.  M.,  96 

Williams,  J.  H.,  296,  329,  336,  347, 

354,  362,  560,  610,  612,  613 
Willis,  Senator,   576 
Wilson,    President,    567 
Wirth,  Dr.,   139 
Withers,  Hartley,  i,  196,  429 
Wurra,  E,,  136 
Wyse,  R.  C,  661,  672 


Zimmerman,  F.  W.  R.,  147 
Zollinger,   W.,   432 


SUBJECT  INDEX 


Acceptances  bought  by  Federal  Reserve  Banks,  665 

Arbitrage,  300-308,  344;  transactions  during  control  of  exchange,  380; 
in  Allied  exchanges,  383;  effect  of,  384;  prohibition  of,  387 

American  Telephone  and  Telegraph  Co.,  securities  returned  to  United 
States,  357 

Army,  American,  expenditures  abroad,  375 ;  property  sold,  376 

Austria,  bankruptcies  of,  523 

Austria-Hungary,  public  debt,  28,  38,  39,  42,  43;  revenue,  32;  war  ex- 
penditures, 37;  note  circulation,  51;  casualties,  52;  exchange  rates 
of  kronen,  318-328;   French  investments  in,  433 


B 

Balance  of  trade.  United  States,  295-299;  United  Kingdom,  effect  in  de- 
preciating exchange,  405;  412;  invisible.  United  Kingdom,  426; 
France,  432,  436 

Bank  act,  England,  suspension  of,  197;   before  and  during  the  war,  212 

Bank,  Federal  Reserve  foreign,  proposed,  388 

Bank  of  England,  development  and  organization,  193-195;  at  outbreak 
of  war,  197;  during  the  war,  198-207;  currency  notes,  200-207; 
changes  in  rediscount  rates,  214;  charter  act  of  1844,  216;  prefer- 
ential rediscount  rates,  425 

Bank  of  France,  advances  to  government,  99,  100,  123  ;  development  of, 
219;  organization  and  functions,  220;  ownership  and  control,  220; 
rates  of  discount,  221;  relation  to  private  banks,  222;  notes  against 
deposit  credit,  222;  foreign  investments,  222;  war  operations,  226- 
242;  statements  of,  227,  230,  231;  gold  policy  during  war,  232,  233; 
advances  to  government,  235;  amortization  fund,  237;  loans  and 
discounts,  238;  moratorium  bills,  239;  notes  in  circulation,  240,  246; 
minor  operations  during  war,  242 

Bankruptcies,  national,  chapter  on,  523;  states  defaulting,  524;  types  of 
bankruptcy,  526;  native  versus  foreign  creditors,  529;  consequences 
and  liquidation  of  bankruptcies,  530;  protection  of  foreign  creditors, 

532 
Banks,   government,    statements   of   in   neutral    and   belligerent  countries, 
175;  changes  in  items  of  statements,  177;  note  circulation,  178;  180; 
specie  and  deposits,  179 

695 


6g6  SUBJECT  INDEX 

Banks,  private,  increase  in  accounts  in  England,  210;  France,  effects  of 
war  on  private  banks,  252;  principal  items  of  statements,  253,  254; 
Germany,  statement  of  private  banks,  284,  285 

Belgium,  public  debt,  28,  38,  39,  42,  43;  revenue,  32;  war  expenditures, 
37;  note  circulation,  51;  casualities,  52;  loans  from  United  Kingdom, 
72;  408;  advances  received  from  Allies,  542;  proportion  of  indemnity 
payments  due  to,  594 

Bonds,  war,  argument  for  and  against,  10,  11;  long-term.  United  King- 
dom, 64;  internal  European,  trading  in,  in  United  States,  359; 
German,  held  abroad,  472 ;   German,  for  payment  of  indemnity,  601 

Boulogne  Conference,  593 

Brussels  Financial  Conference,  figures  of  prices  and  note  issues,  186; 
chapter  on,  617;  aim  of,  617;  diagnosis  of  problems,  618;  memoranda 
submitted  to,  620;  policies  recommended,  622;  text  of  resolutions 
adopted,  626;  appraisal  of  conference,  636 

Budget,  United  Kingdom,  78-85,  486;  France,  post-war,  117-122,  130; 
Germany,  post-war,  149-153 


Cancellation  of  inter-Allied  debts,  chapter  on,  539;  partial  cancellation, 
543;  British  proposals,  550;  American  proposals,  554;  American  op- 
position to,  555;  justification  and  benefits,  557;  amount  of  interest  on 
United  States  government  advances,  562,  563 ;  arguments  against 
cancellation,  570;  payment  of  debt  with  foreign  securities  and  with 
possessions  in  America,  574,  575;  present  course,  577;  ultimate  course, 
579;  need  of  American  foreign  policy,  583 

Capital,  control  of  issues,  United  Kingdom,  66;  issues  restricted,  in 
Germany,  143,  144;  flight  of,  in  Germany,  164-166,  453;  flow  of,  as 
factor  in  exchange  rates,  293  ;  control  of  movement  in  United  States, 
369;  in  foreign  countries,  370;  flow  of,  in  United  Kingdom,  as  ex- 
change corrective,  415;  restriction  on  exports,  United  Kingdom,  419, 
420;  distribution  of  British  capital,  419;  flow  of,  in  France,  442; 
issues  in  Germany,  470;  flow  of,   in  Germany,  476 

Capital  levy,  chapter  on,  485;  principles  of,  in  United  Kingdom,  489; 
misconceptions  concerning,  491;  method  of  payment,  493;  advantages 
and  benefits  expected,  496;  objections  to,  497;  as  form  of  income  tax, 
499;  administrative  difficulties,  501;  held  to  be  a  panacea,  503;  ob- 
jections to  levy  answered,  504;  action  on,  in  United  Kingdom,  512; 
Capital  levy  in  France,  514;  in  Germany,  516;  discussion  of,  in 
Germany,  516-519;  laws  in  German}',  519 

Casualties  in  World  War,  52 

Checks,  popularized  in  France,  251 

Committees,  for  protection  of  holders  of  foreign  securities,  536 

Commodities,  prices  in  Germany,  282,  459,  460,  461;  in  Switzerland,  466; 
movements  of,  as  factor  in  exchange  rates,  292,  345,  411 

Commodity  prices,  charts,  183-185,  187 

Correctives  of  foreign  exchange,  345-371 ;  of  dollar  depreciation  with 
neutrals,  387;  of  depreciation  of  sterling  in  United  Kingdom,  411; 
of  depreciation  of  francs  in  France,  440;  of  depreciation  of  marks 
in  Germany,  472 

Court,  international,  for  settling  financial  disputes,  537 

Credit  institutions,  war,  Germany,  262 

Credit,  mobilization  of  in  Germany,  142 


SUBJECT  INDEX  697 

Crises,  currency,  in  England,  217 

Currency,  deflation  in  England,  215;  crises  in  England,  217;  paper,  small 

denomination    issues   in    France,    249;    deflation    of,   in    France,    255; 

depreciation  of,  in  Germany,  279 ;  deflation  of,  in  Germany,  287 
Currencies,   neutral,  sales  between   United  States  and   United  Kingdom, 

380 

D 

Damages  to  property  by  Germans,  estimates  of,  588 

Darlehnskassen  and  darlehnskassenscheine,  Germany,  142,  143,  258,  263, 
276,  277 

De  Beers  Consolidated  Mines,  Ltd.,  shares  sold  in  United  States,  357 

Debt,  paper,  20;  increase  in  war  debt,  22;  of  United  Kingdom,  23;  of 
United  States,  24;  public  debt,  growth  of,  among  nations,  27,  28; 
of  World  War  belligerents,  36,  38,  39;  per  capita  debt  of  major 
belligerents,  40,  42;  debt  charges,  in  World  War,  38,  40,  42;  charges 
compared  with  income,  41 ;  charges  in  United  Kingdom,  91 ;  debt  of 
United  Kingdom,  82,  91 ;  of  France,  93,  94,  95,  107 ;  of  Germany,  pre- 
war, 135;  war,  137;  post-war,  139,  140;  French  floating  foreign  debt, 
1920,  445 ;  policy  in  handling  public  debt.   United  Kingdom,  487 

Debts,  inter-Allied,  chapter  on,  539;  extent  of,  541;  types  of  proposals 
of  cancellation,  543;  objections  to  cancellation,  554;  alternative  pro- 
posals to  cancellation,  572 

Decontrol   of  exchanges,   396 

Deflation,   Germany,  287 ;   increases  tax  burden,   United  Kingdom,  287 

Depreciation  of  foreign  exchanges,  effects  of,  334-345;  of  franc,  causes, 
435,  effects,  437;  of  sterling,  667 

Devisenbeschaffungsstelle,   Germany,  480 

Distances,  between  New  York  and  London  and  various  ports,  659 

Dollar  exchange,  increased  importance  of,  344;  New  York  as  financial 
center,  658 

Dollar  Securities  Committee,  415 

E 

Edge  Law  corporations,  368 

Embargo  on  gold  shipments,  350-353,  386,  413 

Exchange,  foreign,  depreciation  in  France,  247;  section  on,  291;  theory 
of,  291;  quotations,  308;  causes  of  fluctuations,  329;  effects  of  de- 
preciation, 334;  correctives,  345;  stabilization  of  Allied  exchange  in 
New  York,  371;  abandonment  of  stabilization,  396;  in  United  King- 
dom, 405;  in  Germany,  450;  479;  chapter  on,  610;  outlook,  610; 
correctives,  614;  Brussels  Conference  on,  620 

Exchange  rates,  determinants  of,  291;  in  1919,  United  Kingdom,  France, 
and  Italy,  300;  in  Denmark,  301;  in  1914-17,  in  Switzerland,  and 
Sweden,  302;  foreign  exchange  quotations,  New  York,  1914-1920, 
308,  314,  319;  central  powers,  318-328;  causes  of  fluctuations  in,  329 

Exchequer  bonds,  United  Kingdom,  64 

F 
Federal  Reserve  System,  665 
Finance  bills,  as  factor  in  exchange  rates,  293 
Finance,  war,  1-56;  public  finance,  statistics  of,  25;  war  finance,  appraisal 

of   in    France,    123-134;    war   finance,   theoiy  of  in   Germany,    140; 

reorganization  in  Europe,  188 


698  SUBJECT  INDEX 

France,  public  debt,  28,  38,  39,  42,  43,  93,  94,  95,  97;  wealth  and  Incoma 
increase,  25,  27;  war  expenditures,  37;  taxes,  46,  47,  49;  note  circu- 
lation, 51;  casualties,  52;  loans  from  United  Kingdom,  72;  chapter 
on  public  finance,  93 ;  war  expenditures  and  revenue,  96 ;  foreign  debt, 
107;  taxes,  war,  109-116;  revenue,  war,  109-111;  income  tax,  114, 
120;  profits  tax,  115;  budget,  post-war,  117-122;  appraisal  of  war 
finance,  123-134;  outlook  for  future,  128-133;  chapter  on  currency 
and  credit,  219;  Bank  of  France,  219-224;  war  financial  legislation, 
224-226;  war  operations  of  Bank  of  France,  242;  effects  of  inflation, 
242-254;  outlook,  financial,  254-257;  government  loans  issued  in 
United  States,  363,  364;  loans  from  United  Kingdom,  408;  chapter 
on  foreign  exchange,  432 ;  foreign  investments,  432 ;  foreign  trade, 
436,  438;  foreign  floating  debt,  1920,  445;  borrowings  from  Allies 
and  neutrals,  444;  capital  levy  in,  514;  advances  received  from  Allies, 
542;  cancellation  of  loans  to,  544;  proportion  of  indemnity  pa^meats 
due  to,  594 

Freights,  payment  for,  as  item  in  trade  balance,  295 


Germany,  public  debt,  28,  38,  39,  42,  43;  revenues,  32;  expenditures,  37; 
note  circulation,  51;  casualties,  52;  chapter  on  public  finance,  135; 
national  wealth  and  debt,  pre-war,  135,  136;  war  debt,  137;  war 
expenditures,  138;  war  credits,  138;  floating  debt  in  1920,  139;  post- 
war debt,  140;  losses  under  treaty,  139;  war  loans,  140-146;  methods 
of  war  finance,  142-146;  lottery  loan,  146;  war  taxes,  146-149;  budget, 
post-war,  149-153;  income-tax  rates,  154;  appraisal  of  war  finance, 
155-157;  post-war  taxes,  157-166;  sales  tax,  159;  flight  of  capital, 
164-166;  outlook  for  future,  167-171;  chapter  on  currency  and  credit, 
258;  Reichsbank,  258-260;  war  financial  legislation,  policy,  and  ex- 
pedients, 260-264;  effects  of  inflation,  279-287;  financial  outlook,  287- 
290;  exchange  rates  of  marks,  318-328;  ratio  gold  to  notes,  332; 
government  loans  issued  in  United  States,  363,  364;  chapter  on  foreign 
exchange,  449;  financial  conditions  following  signing  of  treaty,  449; 
foreign  trade,  464;  capital  levy,  516;  bankruptcies.  523;  exchange 
of  inter-Allied  debt  for  indemnity  bonds,  546;  payment  of  indemnity, 
585 ;  effect  of  indemnity  on  exchange,  612 

Gold,  premium  on  in  England,  209;  holdings  of  Reichsbank  during  war, 
269,  270;  gold  supply  and  foreign  exchanges,  303-308;  ratio  to  notes 
in  Germany,  332;  flow  of,  as  foreign  exchange  corrective,  347-353; 
flow  of,  to  neutrals,  385;  exports  from  United  States,  386;  embargo, 
350-353,  386,  413;  insufficiency  of,  in  settling  trade  balances,  390; 
effect  of  release  of  "peg"  on  market,  402;  United  States  imports, 
413 ;  shipments  from  United  Kingdom  as  exchange  corrective,  413 ; 
shipments  in  France,  441;  imports  by  United  States,  442;  shipments 
from  Germany,  475 ;  world  production,  661 

Gold  standard,  reestablishing  in  England,  213 

Great  Britain,  see  United  Kingdom 

Guarantees  of  government  loans,  532 

H 

Hague  Agreement  and  international  debts,  538 
Hythe  Conference,  593 


SUBJECT  INDEX  699 


Income  tax,  France,  114,  120;  Germany  and  England,  154;  post-war 
rates,  160-162 

Indemnity,  estimates  of  damages  to  France,  128-130;  payment  by  Ger- 
many, 170-171 ;  German  indemnity,  chapter  on,  585;  estimates  of 
property  damage,  588;  proposed  indemnity,  590;  peace-treaty  pro- 
visions, 590;  conferences  on,  593;  German  proposals,  595;  terms 
finally  accepted  by  Germany,  596;  method  of  payment,  598;  criticism 
of  indemnity,  603;  French  indemnity  in  1871,  585,  586 

Inflation,  causes  and  nature,  5;  results  and  evils,  6;  how  produced,  173; 
in  peace  and  war,  174;  eflfect  on  prices,  i8i;  effects  in  England, 
207-211;  effects  in  France,  242-254;  effects  in  Germany,  279-287; 
effects  on  exchange  rates,  United  Kingdom,  410;  cause  of  deprecia- 
tion of  mark,  454;  Brussels  Conference  on,  620 

Intervention  by  governments,  to  compel  payment  of  debt,  533 

Investment  trusts,  365 

Investments,  British  foreign,  426-428 ;  French  foreign,  432 ;  German  for- 
eign, 451;  by  foreigners  in  Germany,  470;  effect  of  foreign  investments 
in  United  States  on  exchange  610 

"Invisible   credits"    decline   of    in    United   Kingdom   407;    Germany,   451 

Italy,  public  debt,  28,  38,  39,  42,  43;  revenue,  32;  war  expenditures,  37; 
taxes,  46,  47,  49;  note  circulation,  51;  casualties,  52;  loans  from 
United  Kingdom,  72,  408;  advances  received  from  Allies,  542;  pro- 
portion of  indemnity  payments  due  to,  594 


Latin  Monetary  Union,  breakdown  of,  250,  437 

League  of  Nations,  189,  538,  617,  627,  632,  637,  641 

Loans,  war,  contrasted  with  taxes,  8;  in  War  of  1812,  12;  combined  with 
taxes,  16;  in  World  War,  36,  37;  amounts,  44,  45;  United  Kingdom, 
60,  64,  68,  70,  72;  France,  95-109;  short-term,  100,  124;  long-term, 
102-105,  124;  Germany,  140-146;  list  of,  145;  lottery  loan,  146; 
methods  of  raising,  156;  loans  as  corrective  of  foreign  exchange,  360- 
369;  loans  of  neutrals  to  United  States,  392;  to  Allies,  395;  loans 
of  United  Kingdom  to  Allies,  408;  long-term  loans.  United  Kingdom, 
421;  French  loans  to  Allies,  434;  loans  to  Germany  by  neutrals, 
477;  inter-Allied  loans,  542;  international  loans  for  restoration  of 
Europe,  chapter  on,  638;  need  of,  638;  prerequisites  and  conditions, 
639;  proposed  types,  641;  the  Ter-Meulen-Bruins  plan,  649 

London  as  financial  center,  chapter  on,  658 

Lottery  loans,   United  Kingdom,  87;   France,   104,   125;   Germany,   146 

M 

Militarism,  cost  of  crushing,  567 

Moratorium,  England,   196;   France,  224;   Germany,  263 

Moratorium  bills,  of  Bank  of  France,  239 

N 

Napoleonic  Wars,   England's   advances  to  allies,   539;   inter-Allied  debts 

following,  539-541 ;  indemnity  after,  585 
Neutrals,    exchange    rates    of,    1914-1920,    319;    foreign    trade    before    and 
during  war,   381,   382;   currencies  of,   during  period   of   "peg,"   384; 


700  SUBJECT  INDEX 

flow  of  gold  to,  385;  depreciation  of  dollar  vcith,  387;  tax  on  exports 

to,  388;  credits  opened  with,  392;  effect  on  exchange  rates  of,   396; 

exchange  quotations  in  New  York,   399,  400;   loans  to  Germany,  477 
New  York  as  financial  center,  chapter  on,  65S 

New  York  Central  Railroad  Co.,  securities  returned  to  New  York,  355 
Notes,   increase   in   circulation,   49,    50,    51,    178,    180;   currency,   issue   of, 

in  England,  198;  Bank  of  England,  200,  201,  202,  203,  205,  206,  207; 

Bank  of  France,  222,  240,  246;  Reichsbank,  261,  273-278;   treasury 

notes,  Germany,  278 


Paris  Conference,  594 

"Peg"  of  foreign  exchanges,  329,  331,  371-387;  effects  on  sterling  exchange, 
405;  amounts  mobilized  by  United  Kingdom  during,  416;  sales  by 
United  Kingdom  of  American  securities  after  release  of,  418;  by 
France,  448;    "pegging"   by  international  clearing  house   impossible, 

Population  of  continents,  658 

Prices,  effect  of  inflation  on,  181;  changes  shown  on  charts,  183-185;  187; 
index  numbers,  186,  244,  245;  prices  and  note  issues,  187;  stabiliza- 
tion of,  192;  increase  due  to  inflation,  in  England,  207;  increase  due 
to  inflation,  in  France,  243 ;  rise  in  prices  in  Germany,  280-283 ; 
rise  in  relation  to  fall  in  exchange,  339,  401;  prices  in  Germany  after 
the  war,  457-463;  German  prices  lower  than  world  level,  457;  com- 
modity prices,  Germany,  459,  460,  461 ;  prices  in  Switzerland,  466 

Q 

Quotations,  foreign  exchange  in  New  York,  399,  401 


Railroads,  American,  return  of  securities  to  United  States,  353 
Rand  Mines,  Ltd.,  shares  sold  in   United  States,   358 
Rediscounts,  Bank  of  England,  changes  in  rates,  214 

Reichsbank,    development    of,    258;    organization    and    function    of,    259; 
control    and    concentration    of    gold    supply,    260;    operations    during 
war,   264,   279;   statement  of,   265-269;   gold  policy,  269;   commercial 
bills,    and   discounted   treasury   bills,   271;    note   issues,  273;    deposits, 
278;  turnover  and  profits,  284;  control  of  foreign  exchange  by,  481 
Reichskassenscheine,  treasury  notes,   142,  278 
Reichsabgabeordnung,  Germany,  national  levy  ordinance,  158 
Remittances  as  factor  in  exchange  rates,  293 ;  as  item  in  trade  balance, 

295 
Reparations,  treaty  of  peace,  text  of,   590;  see  also  "Indemnity" 
Revenue,  world,  growth  of,  29,   32;   from  taxes,  48,  49 
Royal  Dutch  Petroleum  shares,  sold  in  United  States,  358 
Russia,  public  debt,  28,  38,  39,  42,  43;  revenue,  32;  war  expenditure,  37; 
note    circulation,    51;    casualties,    52;    loans    from    United    Kingdom, 
72,  408;  government  loans  issued  in  United  States,  363,  364;  French 
investments  in,  433 ;  bankruptcv,  523 ;  advances  received  from  Allies, 
542 


SUBJECT  INDEX  701 


Sales  tax,  Germany,  159 

Savings  banks  deposits,  Germany,  286 

Securities,  mobilization  in  United  Kingdom,  69,  417;  Germany,  issue 
restricted,  143,  144;  return  of  American  securities  as  corrective  of 
exchanges,  353,  415;  sales  of  European  securities  in  United  States, 
357;  liquidation  of,  when  "peg"  was  released,  403;  sales  of  European 
securities  by  United  Kingdom,  418;  sale  of,  in  France,  443;  mobiliza- 
tion of,  in  France,  443 ;  prices  of,  in  Germany,  468,  469 ;  German 
dealings  in,  481 ;  payments  of  debts  to  United  States  in  foreign  se- 
curities,  574 

Self-correctives  of  exchange  depreciation,  334,  378 

"Shell"  Transport  &  Trading  Co.,  Ltd.,  shares  sold  in  United  States,  358 

Shipping,  earnings  of  British,  428 

Spa  Conference,  593 

Specie,  premium  on,  in  France,  248 

Specie  payments,  suspension,  Germany,  260 

Sterling,  exchange  quotations,  405 


Taxes,  war,  contrasted  with  loans,  8;  argument  for  and  against,  14;  com- 
bined with  loans,   16;   of  belligerents  in  World  War,  45;   increases 
in,  48;   United  Kingdom,   74;   war  taxes,   France,   109-116;   post-war 
taxes,   France,   120-122,  126;   taxes,  war,   Germany,   146-149;   income- 
tax  rates,  Germany  and  England,  154,  157;  post-war  taxes,  Germany, 
157-166;   eifect  of  heavy  taxes,    163;   evils  of  high  taxes  in   United 
Kingdom,  486 
Tcr-Meulen  plan  of  International  loans,  652 
Tourists,  expenditures  of,  as  item  in  trade  balance,  295 
Trade,    foreign,    of    United    States   with    certain    foreign   countries,    330; 
of  neutrals  before  and  during  the  war,   381,   382;   foreign  trade  and 
exchange    in    United    Kingdom,    406;    of    France,    436,   438,    587;    of 
Germany,    464;    international    trade    under    depreciated    paper,    613; 
transshipment  trade  of  United  Kingdom,  660,  669 
Treasury  bills.   United  Kingdom,  62,  63,  68,  377,  422;   France,  loi,  444; 

foreign,  issued  in   United  States,  360 
Treasury  notes,  Germany,  142,  261,  271 

Treaty  of  Peace,   German   losses  under,   139;   indemnity   provisions,   590 
Turkey,  public  debt,  28,  38,  39,  42,  43;  revenue,  32;  war  expenditures,  37; 
note  circulation,  51 ;  casualties,  52 

U 

United  Kingdom,  wealth  and  debt  increase,  23,  25,  26;  public  debt,  28, 
38,  39,  42,  43,  60,  61;  revenue,  32;  war  expenditures,  37;  taxes,  46, 
47,  49;  note  circulation,  51;  casualties,  52;  chapter  on  public  finance, 
57;  loans  to  Allies,  72;  taxes,  74;  budget,  78;  chapter  on  currency 
and  credit,  193;  war-time  currency  legislation,  195-198;  suspension 
of  bank  act,  197;  issue  of  currency  notes,  198;  Bank  of  England 
during  the  war,  198-207;  inflation,  effects  of,  207-211;  on  prices,  207; 
on  wages,  209;  gold  premium,  209;  post-war  policy,  211;  government 


702  SUBJECT  INDEX 

loans  issued  in  United  States,  363,  364;  chapter  on  foreign  exchange, 
405;  capital  levy,  485;  advances  received  from  allies,  542;  cancel- 
lation of  loans  by,  545 ;  proportion  of  indemnity  payments  due  to, 
594;  reasons  for  financial  world  leadership  before  the  war;  659-663; 
after  the  war,  668-671 

United  States,  wealth  and  debt  increase,  24;  public  debt,  28,  38,  39,  42, 
43;  revenue,  32;  taxes,  46,  47,  49;  note  circulation,  51;  casualties, 
52;  advances  to  United  Kingdom,  71,  421;  balance  of  trade,  295-299; 
advances  to  Allies,  371-377,  542;  advances  to  France,  447;  effect 
of  foreign  investments,  6io 

United  States  Steel  Corporation,  securities  returned  to  United  States,  355 


W 

Wages  increased  in  England,  209;  in  Germany,  282,  283 

War,  financing  of,  1-56;  burden  on  future  generations,  7;  Napoleonic 
Wars,  debt  from,  24,  25;  loss  of  life,  52;  expenditures  of  United 
Kingdom  during  Napoleonic  Wars,  90;  cost  of  war,  29,  30;  indirect 
costs  of  war,  51;  World  War,  total  cost,  31;  errors  in  estimating, 
33;  direct  costs,  35;  public  debt  resulting  from,  40-44;  taxes  during, 
45;  indirect  costs,  51;  casualties,  52;  property  loss,  53;  inter-Allied 
debts  following,  539-541;  effect  on  financial  centers,  658;  changes 
in  trade,  shipping,  and  financial  conditions  of  United  Kingdom,  664 

War  Finance  Corporation,  367,  391 

War  Savings  Certificates,  United  Kingdom,  68 

War-wealth  levy  in  United  Kingdom,  506;  justification  of,  506;  objection 
to,  507;  compared  with  capital  levy,  508;  theory  and  method  of,  508 

Ways  and  Means  advances,  United  Kingdom,  62;  post-war,  213 

Wealth,  national,  18;  real  wealth  and  paper  debt,  20;  rapid  increase, 
22;  of  Great  Britain,  23,  26;  of  United  States,  24;  wealth  and  in- 
come, 25;  wealth  of  France,  25,  27;  national  wealth  and  debt,  41, 
43 ;  national  wealth.  United  Kingdom,  91 ;  wealth  distribution  in 
United  Kingdom,  485 ;  levy  on,  489 


uc  so:.;thfr":  Rr"t~";-L  'jb?.:.^:/  'acility 


AA    000  993  503    2 


